Dynamic multifactor shifting from lowvol+quality to momentum+size+value

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HippoSir
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Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by HippoSir » Thu Jul 11, 2019 12:34 pm

I thought the following was interesting, at least one dynamic multifactor fund seems to be changing its tilt from low volatility+quality to momentum+small+value:

https://www.bloomberg.com/news/articles ... ?srnd=etfs

I've been watching these factor timing strategies with some interest, it seems at least the folks behind OMFL think value is poised to outperform again. I'm very curious to see how this works out in practice.

garlandwhizzer
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by garlandwhizzer » Thu Jul 11, 2019 1:34 pm

Read the article. The gist is that by shifting relative factor weights in the multi-factor ETF:
That ETF is positioning for expansion after six-month slowdown
I believe their macro-economic call and therefore their multi-factor portfolio changes have as much probability of being right as a coin flip. This points out how much like active management dynamic multi-factor approaches can be. It's based on a management decision prodicting the future. It works well if you know accurately what's going too happen in the economy in the near term future. The problem is that there are so many variables and so many unknowns that determine the future status of the economy, no one knows that with this degree of actionable certainty. They're making a bet, and like all bets, they could be right or wrong. IMO they have no more than a 50/50 chance of being right. The market presently prices in its aggregate expectation for our economic future. These managers believe that the market is too pessimistic. Maybe, maybe not. The track record of experts who attempt to predict where the economy or the market is going in the near term often turns out to be laughably inaccurate. Less than 50/50 I suspect. See Larry's annual "sure thing" forecasts. Time will tell but my guess is that their crystal ball is as cloudy as everyone else's.

Garland Whizzer

steve r
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by steve r » Thu Jul 11, 2019 4:56 pm

As a low vol investor for many years now ... the reason for the change in the article is NOT a change in data but investors demanding higher return is the very reason why I believe the low vol strategy works ... people effectively wanting lottery tickets.
Maximize Diversification - Minimize Costs - Avoid Lotteries

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asset_chaos
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by asset_chaos » Thu Jul 11, 2019 7:10 pm

The record of market timing (tactical asset allocation) funds is dismal. A M* study found that not one of the TAA funds they follow had beaten vanguard balanced index [1]. I expect funds market timing factors will lead to similarly dismal results, albeit more difficult to benchmark.

[1] “We found that very few tactical funds generated better risk-adjusted returns than Vanguard Balanced Index over the extended time period we studied. Not only has the group of tactical allocation funds underperformed, but not a single one of them outperformed the simple, low-cost, passive fund.” from Ptak J. In Practice: Tactical Funds Miss Their Chance. Morningstar Advisor; 2012, as quoted in https://doi.org/10.1371/journal.pone.0200561 which gives additional reasons for why market timing is likely to fail.
Regards, | | Guy

Forester
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by Forester » Fri Jul 12, 2019 3:53 am

asset_chaos wrote:
Thu Jul 11, 2019 7:10 pm
The record of market timing (tactical asset allocation) funds is dismal. A M* study found that not one of the TAA funds they follow had beaten vanguard balanced index [1]. I expect funds market timing factors will lead to similarly dismal results, albeit more difficult to benchmark.

[1] “We found that very few tactical funds generated better risk-adjusted returns than Vanguard Balanced Index over the extended time period we studied. Not only has the group of tactical allocation funds underperformed, but not a single one of them outperformed the simple, low-cost, passive fund.” from Ptak J. In Practice: Tactical Funds Miss Their Chance. Morningstar Advisor; 2012, as quoted in https://doi.org/10.1371/journal.pone.0200561 which gives additional reasons for why market timing is likely to fail.
A market timing fund (what is the methodology? what is the fee structure?) is not the same thing as market timing. Stocks, bonds, REITs; TAA had similar returns to buy and hold with reduced drawdowns https://alphaarchitect.com/2018/10/16/w ... following/

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packer16
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by packer16 » Fri Jul 12, 2019 7:07 am

garlandwhizzer wrote:
Thu Jul 11, 2019 1:34 pm
Read the article. The gist is that by shifting relative factor weights in the multi-factor ETF:
That ETF is positioning for expansion after six-month slowdown
I believe their macro-economic call and therefore their multi-factor portfolio changes have as much probability of being right as a coin flip. This points out how much like active management dynamic multi-factor approaches can be. It's based on a management decision prodicting the future. It works well if you know accurately what's going too happen in the economy in the near term future. The problem is that there are so many variables and so many unknowns that determine the future status of the economy, no one knows that with this degree of actionable certainty. They're making a bet, and like all bets, they could be right or wrong. IMO they have no more than a 50/50 chance of being right. The market presently prices in its aggregate expectation for our economic future. These managers believe that the market is too pessimistic. Maybe, maybe not. The track record of experts who attempt to predict where the economy or the market is going in the near term often turns out to be laughably inaccurate. Less than 50/50 I suspect. See Larry's annual "sure thing" forecasts. Time will tell but my guess is that their crystal ball is as cloudy as everyone else's.

Garland Whizzer
IMO it is less than 50% compared to a market cap weighted index due to the fact that there are many more chances to lose versus win versus an index which includes the wisdom of the crowds. I think this explains the underperformance of AQR's multi-factor fund & why this technique, like active management on average, has a low probability of success versus a market cap weighted index fund.

Packer
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asset_chaos
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Re: Dynamic multifactor shifting from lowvol+quality to momentum+size+value

Post by asset_chaos » Fri Jul 12, 2019 9:57 am

Forester wrote:
Fri Jul 12, 2019 3:53 am
asset_chaos wrote:
Thu Jul 11, 2019 7:10 pm
The record of market timing (tactical asset allocation) funds is dismal. A M* study found that not one of the TAA funds they follow had beaten vanguard balanced index [1]. I expect funds market timing factors will lead to similarly dismal results, albeit more difficult to benchmark.

[1] “We found that very few tactical funds generated better risk-adjusted returns than Vanguard Balanced Index over the extended time period we studied. Not only has the group of tactical allocation funds underperformed, but not a single one of them outperformed the simple, low-cost, passive fund.” from Ptak J. In Practice: Tactical Funds Miss Their Chance. Morningstar Advisor; 2012, as quoted in https://doi.org/10.1371/journal.pone.0200561 which gives additional reasons for why market timing is likely to fail.
A market timing fund (what is the methodology? what is the fee structure?) is not the same thing as market timing. Stocks, bonds, REITs; TAA had similar returns to buy and hold with reduced drawdowns https://alphaarchitect.com/2018/10/16/w ... following/
I'm not sure what that statement means. That article you cite says they are talking about hypothetical results of trend following. The studies I quote use results from real funds running real money and having real costs. Lots of things look good in back testing. If you'd prefer, I'd go so far as to change the verb tense to "The record of market timing funds has been dismal." Hope---or is that hype---springs eternal.
Regards, | | Guy

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