AQR still singing the same song

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garlandwhizzer
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AQR still singing the same song

Post by garlandwhizzer »

The following is an article from Pensions and Investments Online about AQR's troubles with lousy performance, high fees, and fleeing investor base. It is worth reading for those who are considering expensive complex quant strategies which as a group they have massively underperformed for a decade. Remember in the early days when multi-factor fund first came out? Multi-factor was touted to be the ultimate answer. It was supposed to outperform and do so with lower risk and volatility. After all 90% of all returns came from factors so including as many as you wanted seemed a slam dunk in theory. If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that. Likewise AQR's bets on multi-factor long/short and multi-asset long/short have also hit hard times. I have yet to hear a convincing explanation from factor adherents for this. The only answer given is just wait, it's coming in the future. Maybe it will. Maybe it won't. I don't know.

In the first quarter of 2020, AQR hemorrhaged 43 billion dollars in assets, some of it from investors fleeing, much from its investment losses. It is amazing to me that multiple state and city pension funds chose AQR Delta Fund which has strikingly underperformed. Mr. Asness must give a great interview. Several of those pension plans have bailed out now, fed up with high fees and substantial underperformance. They've apparently had enough of paying big fees for brilliant, sophisticated, state of the art investment strategies that sound so compelling in theory but have instead produced a massive opportunity cost relative to beta (TSM) which can be accessed successfully for 0.04% a year.

Mr. Asness has kept the faith through all this trouble. He is still as enthusiastic as ever, perhaps even more so due to the current value/growth valuation disparity. Nonetheless there is no denying that Mr. Market has served Mr. Asness a huge slice of humble pie. I am not going to predict whether AQR will rise and produce great results or continue its decline. I know that I don't know that future up front. I suspect that Mr. Asness may not realize that he doesn't know it accurately either. Personally I don't believe that future market action is written in stone because of long term backtesting results. Others see it differently which is what makes markets.

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typical.investor
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Re: AQR still singing the same song

Post by typical.investor »

garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm The following is an article from Pensions and Investments Online about AQR's troubles with lousy performance, high fees, and fleeing investor base. It is worth reading for those who are considering expensive complex quant strategies which as a group they have massively underperformed for a decade. Remember in the early days when multi-factor fund first came out? Multi-factor was touted to be the ultimate answer. It was supposed to outperform and do so with lower risk and volatility. After all 90% of all returns came from factors so including as many as you wanted seemed a slam dunk in theory. If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that.
Yes, that has been the view of the factor camp that vehemently has argued a portfolio without factor exposure lacks diversification which to me has always seemed like a scare tactic as virtually every investor knows insufficient diversification is potentially dangerous.

Other factor proponents acknowledge that factor correlations can, will and do increase dramatically at times, and that factors are not truly independent as so often claimed. RAFI has been arguing this for a long time despite their offering multi-factor funds. A long period of multi-factor underperformance should not be surprising to anyone who cared to pay attention.

So while I disagree with AQR's aggressive claims and have argued against the "factor diversification" view, I agree with AQR that the thing to do for factor investors is to stay the course.

Factor correlations should be expected to rise during certain periods, factor returns should be expected to reach extreme (and possibly negative) levels (compared to a normal distribution), and factor momentum should be expected to cause those conditions which we don't like for longer than may be easily comfortable.

I believe it is for those unattractive reasons that factors offer a premium. They are difficult to hold and should be expected to be so. If they weren't, why wouldn't they become the preferred market portfolio?

See https://papers.ssrn.com/sol3/papers.cfm ... wnload=yes
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Re: AQR still singing the same song

Post by Lauretta »

garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm

Mr. Asness has kept the faith through all this trouble. He is still as enthusiastic as ever, perhaps even more so due to the current value/growth valuation disparity.
This shows to me how one's character and emotions are important in investing. I am a small investor and I've had a value tilt, and I'm feeling demoralised that it keeps lagging the market, so that a simple World fund would have done a lot better and would have required much less research on my part. Mr Asness seems very enthusiastic, perhaps this is also because he risks losing clients and thus revenue if he isn't, but I think it also depends on personality - for example he posted a picture of himself after having skin cancer removed from his nose recently and he seemed in pretty a good mood; many people wouldn't have been I don't think.
All this to say that one's mood and emotional reactions are probably the most important thing in investing I am discovering. (for example for someone like me, even though I was intellectually attracted to value investing, I am learning that something simpler is probably best)
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Re: AQR still singing the same song

Post by Robert T »

.
Tracking error pain/periods of significant underperformance is not new to Asness. He almost went out of business in 1999, but did not capitulate on his approach. I don’t expect capitulation at all this time either. I remember this earlier article https://www.nytimes.com/2005/06/05/maga ... iches.html
“...his new hedge fund [in 1998/9] was like a dripping faucet he couldn't turn off: every month, it seemed, it was down another 2 percent. The fundamental insight that drove his model -- cheap beats expensive more than it should -- simply didn't work during the Internet bubble. Expensive wasn't just beating cheap. It was crushing cheap. Outrageously expensive tech stocks just kept getting more expensive. … What Asness didn't do, however, was capitulate to the bubble. "Our belief in the process never wavered," … Asness says that if the bubble had lasted six more months, he would have been out of business. But it didn't. He had outlasted it.”
It is easy in a down market to become cynical i.e. that Asness is the only one making money (and a lot of it) while his client are not. While AQR seems to like to advertise AUM, and fees for their long-only products are not as low as alternatives, Asness believes in his products, enough to invest his own money in them.
If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that.
To be fair, this is not what multi-factor proponents say. The don’t say that other factors will “more than make up the slack”. As Swedroe pointed out adding more factors (e.g. momentum and quality) can help reduce the likelihood of long-term underperformance, and avoid the extreme highs and lows of any one factor. Multifactor investors who believe there will be no periods of underperformance relative to the market will be extremely disappointed. e.g. small value is a multi-factor fund (3-factors mkt, size, and value). If we look at YTD performance, while the AQR multistyle funds still appear to be value dominant, adding momentum and quality has avoided the extreme lows of large cap and small cap value funds. While DFA has added momentum and profit screens these seem to have very light weight relative to the AQR funds.

Performance YTD:
  • DFA US Small Value [DFSVX] = -21.1%
    AQR Small Cap Multistyle [QSMILX] = -8.6%

    DFA US Large Value [DFLVX] = -15.6
    AQR Large Cap Multistyle [QCELX] = 0.46

    DFA International Value [DFIVX] = -16.7
    AQR International Multistyle [QICLX] = -6.14

    DFA Emerging Markets Value [DFEVX] = -13.2
    AQR Emerging Market Multistyle [QEELX] = -0.29

I do think some of the more complex AQR funds such as QSPIX have been over marketed as being ‘safer’ than they really are (e.g. -17.9% YTD). But then again if we compare it to the AQR long-only multifactor funds. If you add back beta and half the return of QSPIX (as a proxy for the long part of the long/short return) and divide by 4 for leverage use in QSPIX you get 4.2 + (0.5*(-17.9))/4 = 2.0% which is slightly better than the AQR US Multistyle fund [QCELX] = 0.5% - perhaps due to is added diversification across different markets. So in this context it is no far off what you would expect.

I don’t own any AQR products. As a long-only investor for my needs, I prefer lower cost alternatives. But I understand what Asness is trying to do - will be interesting to see how the funds continue to perform.
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Last edited by Robert T on Sat Sep 12, 2020 6:51 pm, edited 1 time in total.
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nedsaid
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Re: AQR still singing the same song

Post by nedsaid »

After I teased Cliff a bit for somewhat resembling Rob Reiner, I don't think I will be getting any job offers from him. "Get outta my chair, meathead." He actually did graciously respond to my post, saying that he loved All In The Family and that this gave him incentive to lose weight. I appreciated his good humor but as far as I can tell hasn't posted here since.

He is quite articulate, has a good sense of humor, and his articles are informative. I wouldn't write him off or AQR just yet, Robert T has a post above that shows that AQR Value strategies have outperformed long-only Value year to date. I do own a couple of Liquid Alt funds through a Private Client Group managed portfolio, and those Liquid Alt funds have been nothing to write home about. So I am not a fan of Liquid Alts, at best they have provided similar returns to boring old bonds. The experience of such things as Liquid Alt funds and 130/30 Long/Short funds suggest that the markets are pretty darned efficient.

I also wonder about multi-factor funds, if you aren't careful, you can get a cancelling out effect by combining factors too much or incorrectly. It seems that Quality/Profitability improves Small and Value and that Value is improved by setting Momentum to neutral. But I don't follow all of this day to day and I wonder if what Larry Swedroe said about this in the past is still holding up. It seems that everyone is tweaking their approach to factors and it seems that factor tilting is a moving target. I think if one combines Quality with Size and Value, that is probably the best you are going to do. Too many factors at once just may not work in real life and the disappointment from multi-factor funds reinforces this view.

I would rather use a long only approach to factors. The shorting and leverage techniques don't seem to work as designed. Probably simpler approaches work better than the more complex. We might be reduced to Mark Twain's warning to buy stocks only if they go up, if they don't go up don't buy them.

I have also wondered if the volume of articles and studies regarding the factors has ruined the premium. Larry Swedroe has posted that the premiums have been cut by about 1/3.

In fairness to Cliff, Value oriented strategies, particularly when you employ leverage and shorting, are not going to work so well in a Growth environment, this Growth trend has lasted over a decade now. No wonder there is a lot of disappointment with his funds. If Value comes back, AQR will look better. We are seeing signs that the Large Cap Growth/High Tech and Internet/FAANG stocks Bull Market is showing signs of strain recently. So Mr. Asness might be vindicated and maybe sooner than we think.
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Re: AQR still singing the same song

Post by AlphaLess »

AQR suffers from a typical hedge-fund manager vs investor issue.

There are several issues with AQR:
- they have no alpha,
- they employ a massive marketing machinery,
- they employ mediocre people. We interview routinely from AQR and their talent is mediocre (as compared to what I would consider acceptable talent for top hedge funds),
- they publish their "research". This is the most laughable aspect of their operation. No one in their right mind publishes anything that is a source of excess returns.
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Re: AQR still singing the same song

Post by afan »

AlphaLess wrote: Sat Sep 12, 2020 3:46 pm AQR suffers from a typical hedge-fund manager vs investor issue.

There are several issues with AQR:
they publish their "research". This is the most laughable aspect of their operation. No one in their right mind publishes anything that is a source of excess returns.
You are missing the brilliance of AQR. It is not in money management. You can get that from VTI essentially for free.

I suspect you are not interviewing the marketing people. They managed to convince people to invest billions of dollars in the notion that they had found a loophole in market efficiency.

The investors would have been better off in VTI, hardly a surprise.

The managers, and I assume the marketing people, got to keep the outrageous fees.

I find that pretty impressive.
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Re: AQR still singing the same song

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garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm The following is an article from Pensions and Investments Online about AQR's troubles with lousy performance, high fees, and fleeing investor base. It is worth reading for those who are considering expensive complex quant strategies which as a group they have massively underperformed for a decade. Remember in the early days when multi-factor fund first came out? Multi-factor was touted to be the ultimate answer. It was supposed to outperform and do so with lower risk and volatility. After all 90% of all returns came from factors so including as many as you wanted seemed a slam dunk in theory. If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that. Likewise AQR's bets on multi-factor long/short and multi-asset long/short have also hit hard times. I have yet to hear a convincing explanation from factor adherents for this. The only answer given is just wait, it's coming in the future. Maybe it will. Maybe it won't. I don't know.
Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Last edited by 000 on Sat Sep 12, 2020 7:51 pm, edited 2 times in total.
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Re: AQR still singing the same song

Post by UpperNwGuy »

I used to work for the Department of Defense, and we invested a lot of energy in trying to convince the military services to stop preparing to fight the last war and look instead toward potential future conflicts.

To me factor investing is like preparing to fight the last war.
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Re: AQR still singing the same song

Post by PicassoSparks »

Value Factor was written about in either 1934 or 1993 depending on whether you want to credit Graham or Fama/French. Value has outperformed since then.
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Re: AQR still singing the same song

Post by typical.investor »

UpperNwGuy wrote: Sat Sep 12, 2020 6:50 pm I used to work for the Department of Defense, and we invested a lot of energy in trying to convince the military services to stop preparing to fight the last war and look instead toward potential future conflicts.

To me factor investing is like preparing to fight the last war.
Well, I think factor investing explains recent returns quite well. Those who had exposure to momentum have done best. I guess you can argue people are buying tech stocks on fundamentals, but I suspect it's rather simply that they have been going up.

This doesn't mean that momentum will always do well of course.
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Re: AQR still singing the same song

Post by rkhusky »

typical.investor wrote: Sat Sep 12, 2020 8:39 pm
Well, I think factor investing explains recent returns quite well.
Actually, factor models explain many investment returns quite well. Factor investing has very little to do with factor models, other than both involve factors.
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Re: AQR still singing the same song

Post by corp_sharecropper »

What I can't quite wrap my head around is how AQR seems to have failed at successfully implementing a risk parity fund. I mean risk parity has worked all these years except in AQR's hands. It's like they hired the from the same school as Wealthfront.
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Re: AQR still singing the same song

Post by HomerJ »

Lauretta wrote: Sat Sep 12, 2020 1:10 ambut I think it also depends on personality - for example he posted a picture of himself after having skin cancer removed from his nose recently and he seemed in pretty a good mood; many people wouldn't have been I don't think.
Most people don't have 3 billion dollars plus (from suckers who believe Asness could actually predict the future)
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Re: AQR still singing the same song

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000 wrote: Sat Sep 12, 2020 6:46 pm
garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm The following is an article from Pensions and Investments Online about AQR's troubles with lousy performance, high fees, and fleeing investor base. It is worth reading for those who are considering expensive complex quant strategies which as a group they have massively underperformed for a decade. Remember in the early days when multi-factor fund first came out? Multi-factor was touted to be the ultimate answer. It was supposed to outperform and do so with lower risk and volatility. After all 90% of all returns came from factors so including as many as you wanted seemed a slam dunk in theory. If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that. Likewise AQR's bets on multi-factor long/short and multi-asset long/short have also hit hard times. I have yet to hear a convincing explanation from factor adherents for this. The only answer given is just wait, it's coming in the future. Maybe it will. Maybe it won't. I don't know.
Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Here's an example from 1997 until now: https://www.portfoliovisualizer.com/bac ... tion4_2=45
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Re: AQR still singing the same song

Post by nisiprius »

YRT70 wrote: Sun Sep 13, 2020 9:36 am
Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Here's an example from 1997 until now: https://www.portfoliovisualizer.com/bac ... tion4_2=45
Not all, but mostly just more-return-for-more-risk. The difference in the Sharpe and Sortino ratios hasn't been huge.

Source

Image

Both factor enthusiasts and factor skeptics need to wrestle with the "one great shining moment" problem. The Fama and French papers were published in 1992 and 1993, and DFA was fast off the mark with factor funds. But fact #1 is that "out of sample" testing begins in the late 1990s. And fact #2 is that the classic factor strategies, including the simple Bill Schultheis Coffeehouse Portfolio implemented with yucky Vanguard funds, performed spectacularly from 2000-2003, doing everything you'd hope for, going up when the stock market went down. But not before and not since. It really happened, it was huge, and authors were in print with specific recommendations for it before it happened. And it's done little harm since then.

So there was what could almost be called a jackpot in 2000-2003. It's all 2000-2003. You can usually tell how any attempt to evaluate factor strategies with real mutual funds and ETFs will turn out, by answering one question: does the time period being considered include 2000-2003 or not?

I honestly have no idea how to regard strategies--or mutual funds--that have had "one great shining moment." It really happened, and the people who followed those strategies in 2000-2003 have real money to show for it, but...
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Re: AQR still singing the same song

Post by kolder »

nisiprius wrote: Sun Sep 13, 2020 9:58 am
YRT70 wrote: Sun Sep 13, 2020 9:36 am
Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Here's an example from 1997 until now: https://www.portfoliovisualizer.com/bac ... tion4_2=45
Not all, but mostly just more-return-for-more-risk. The difference in the Sharpe and Sortino ratios hasn't been huge.

Source

Image

Both factor enthusiasts and factor skeptics need to wrestle with the "one great shining moment" problem. The Fama and French papers were published in 1992 and 1993, and DFA was fast off the mark with factor funds. But fact #1 is that "out of sample" testing begins in the late 1990s. And fact #2 is that the classic factor strategies, including the simple Bill Schultheis Coffeehouse Portfolio implemented with yucky Vanguard funds, performed spectacularly from 2000-2003, doing everything you'd hope for, going up when the stock market went down. But not before and not since. It really happened, it was huge, and authors were in print with specific recommendations for it before it happened. And it's done little harm since then.

So there was what could almost be called a jackpot in 2000-2003. It's all 2000-2003. You can usually tell how any attempt to evaluate factor strategies with real mutual funds and ETFs will turn out, by answering one question: does the time period being considered include 2000-2003 or not?

I honestly have no idea how to regard strategies--or mutual funds--that have had "one great shining moment." It really happened, and the people who followed those strategies in 2000-2003 have real money to show for it, but...
Conversely the vast majority of all factor underperformance has come from 2017-2020. Outside of 2000-2003 and 2017-2020 things are pretty quiet.
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Re: AQR still singing the same song

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garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm
In the first quarter of 2020, AQR hemorrhaged 43 billion dollars in assets, some of it from investors fleeing, much from its investment losses. It is amazing to me that multiple state and city pension funds chose AQR Delta Fund which has strikingly underperformed. Mr. Asness must give a great interview. Several of those pension plans have bailed out now, fed up with high fees and substantial underperformance. They've apparently had enough of paying big fees for brilliant, sophisticated, state of the art investment strategies that sound so compelling in theory but have instead produced a massive opportunity cost relative to beta (TSM) which can be accessed successfully for 0.04% a year.
IMO unfair to single out AQR on this front, assets fleeing active for passive is a broad movement. You also bizarely blame Asness's personality for gathering assets; isn't it up to pension fund managers to do their own thorough research?

Also are these uniquely AQR issues? Value - all value stratgies have struggled. Managed futures - all CTA strategies flat for the decade, etc etc.
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Re: AQR still singing the same song

Post by nisiprius »

kolder wrote: Sun Sep 13, 2020 10:38 am
nisiprius wrote: Sun Sep 13, 2020 9:58 am...So there was what could almost be called a jackpot in 2000-2003. It's all 2000-2003. You can usually tell how any attempt to evaluate factor strategies with real mutual funds and ETFs will turn out, by answering one question: does the time period being considered include 2000-2003 or not?...
Conversely the vast majority of all factor underperformance has come from 2017-2020. Outside of 2000-2003 and 2017-2020 things are pretty quiet.
Yes, that's so. So we have basically a 27-year period, measuring from inception of the DFA Small Cap Value Portfolio fund in 1993 to now, in which there have been two three-year bursts--one up, one down.

So that's an average of one burst every fifteen years.

And what you are really asking, when looking toward the future, is "during the next thirty years, how many more bursts do you think you will get, and do you think the ups will outweigh the downs or the other way around?"
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Re: AQR still singing the same song

Post by nisiprius »

Forester wrote: Sun Sep 13, 2020 12:02 pm...Also are these uniquely AQR issues? Value - all value stratgies have struggled. Managed futures - all CTA strategies flat for the decade, etc etc....
Well, nobody put a gun to their head and say "hitch all your wagons to the value star."

Back in November, 2018, I took an overall look at how AQR's funds had performed relative to the benchmarks AQR had chosen for them. I don't feel like taking the time to update it right now--it was a lot of work. I included another chart that included all their funds but I thought and think that it ridiculous to allow highly volatile funds to be benchmarked to Treasury bills, so I plotted this second chart which throws out all the fancy-schmancy market neutral things (including QSPIX).

As of then, AQR's record wasn't very pretty:

Image

If we pick out a few that might be called "plain vanilla funds that could demonstrate AQR's ability to provide appealing substitutes for index funds," I think they would be:

AQR Large-Cap Multi-Style Fund, QCELX, ER 0.39%
AQR Small-Cap Multi-Style Fund, QSMLX, ER 0.60%
AQR Global Equity Fund, AQGIX, ER 0.81%

I haven't looked at them yet and I'm going to look at them and post whatever the results turn out to be. I'm going to compare them to the obvious Vanguard equivalent. Let's see what AQR can do without long-short portfolios, leverage, and no commitment to any particular style.

In each case, AQR's fund is plotted in blue, Vanguard's equivalent index fund in red, and, to show that there's nothing special about Vanguard here, a Vanguard competitor's equivalent index fund in yellow.

For AQR, two stinkers, and one that looked good until recently.

Image

Image

Image
Last edited by nisiprius on Sun Sep 13, 2020 8:15 pm, edited 1 time in total.
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Re: AQR still singing the same song

Post by Steve Reading »

nisiprius wrote: Sun Sep 13, 2020 9:58 am You can usually tell how any attempt to evaluate factor strategies with real mutual funds and ETFs will turn out, by answering one question: does the time period being considered include 2000-2003 or not?
If by "evaluate factor strategies with real funds", you mean "evaluate the value factor in the USA", then yes you're right.
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Re: AQR still singing the same song

Post by GaryA505 »

AQR seems to be a mixed bag. I hold some of their AUENX which appears to be one of their best ones. On the other hand, they seem to have some really oddball funds that are just, well, odd.
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Re: AQR still singing the same song

Post by PicassoSparks »

nisiprius wrote: Sun Sep 13, 2020 9:58 am Both factor enthusiasts and factor skeptics need to wrestle with the "one great shining moment" problem.
Is this importantly different from stocks in general? All those studies showing that most of the returns come from a very small number of good days (or bad days)…
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Re: AQR still singing the same song

Post by garlandwhizzer »

Forester wrote:

IMO unfair to single out AQR on this front, assets fleeing active for passive is a broad movement. You also bizarely blame Asness's personality for gathering assets; isn't it up to pension fund managers to do their own thorough research?
I agree that the movement from active/expensive to passive/inexpensive is a broad trend, not just AQR. I never said it was just AQR. I don't expect this trend to stop or reverse anytime soon. I did not blame Asness's personality for gathering assets. I wrote that he must give a great interview I believe to be true. That is a huge plus if you're in the business of marketing an expensive financial product. Cliff did his job very well: the pension fund managers did theirs very poorly. Clearly the responsibility for investment choice lies fully with the pension fund managers. Many pension funds these days looking at lower expected future returns on stocks and bonds are IMO making the same mistake, investing in expensive complex strategies rather than accepting realistic future return estimates for traditional investments because these numbers don't work well to meet their obligations. I personally believe that most who take that more complex expensive approach will fail to outperform traditional assets using index approaches.

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Re: AQR still singing the same song

Post by 000 »

YRT70 wrote: Sun Sep 13, 2020 9:36 am
000 wrote: Sat Sep 12, 2020 6:46 pm
garlandwhizzer wrote: Fri Sep 11, 2020 8:05 pm The following is an article from Pensions and Investments Online about AQR's troubles with lousy performance, high fees, and fleeing investor base. It is worth reading for those who are considering expensive complex quant strategies which as a group they have massively underperformed for a decade. Remember in the early days when multi-factor fund first came out? Multi-factor was touted to be the ultimate answer. It was supposed to outperform and do so with lower risk and volatility. After all 90% of all returns came from factors so including as many as you wanted seemed a slam dunk in theory. If SCV had trouble, no problem, the other factors would more than make up the slack. Well, since multi-factor inception the exact opposite has occurred. Underperformance with greater volatility and greater maximal drawdown has happened. Unlike SCV which sometimes goes into long periods of underperformance, multi-factor isn't supposed to do that. Likewise AQR's bets on multi-factor long/short and multi-asset long/short have also hit hard times. I have yet to hear a convincing explanation from factor adherents for this. The only answer given is just wait, it's coming in the future. Maybe it will. Maybe it won't. I don't know.
Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Here's an example from 1997 until now: https://www.portfoliovisualizer.com/bac ... tion4_2=45
As nisiprius pointed out, there is the question of higher risk and how these funds were actually recommended to be used.

Let's look at the 30 SCV / 70 ITT portfolio promoted by a Prominent SCV Promoter, which I believe was suggested could replace a traditional 60/40.

Lump sum from March 1993 60/40 beat Prominent SCV Promoter Portfolio by 1.20% CAGR

Lump sums from March 1994 and 1995 were similar.

Monthly DCA from March 1993 60/40 beat Prominent SCV Promoter Portfolio by 1.26% CAGR

Some will say, well duh, the 60/40 had more stocks, but I believe that many SCV promoters claimed that SCV had enough higher expected return to allow for a lower stock allocation.

Can anyone find an actual factor portfolio suggested by a factor publicizer that non-trivially beat a reasonably chosen benchmark post-publication?
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Re: AQR still singing the same song

Post by Robert T »

.
David Booth of DFA published this article in April 2001 http://www.prudentllc.com/sevg/PDFs/Ind ... xFunds.pdf
Here’s the article's all equity ‘balanced’ strategy performance since May 2001 https://www.portfoliovisualizer.com/bac ... ion13_2=30

But this one doesn’t count, right (because it had higher return and Sharpe, is too complex, and included 2001-03)?

IMO the outpeformance is not free, in comes with higher risk. So where’s the risk? IMO its in the larger drawdowns when the market does poorly (as reflected by the max draw-down comparison in the financial crisis).

Ben Graham’s Security Analysis was published in 1934 – prominent students of Graham (on value investing) were Warren Buffet and Bill Ruane who Warran Buffet met in Ben Graham’s class. We know the long-term performance of Buffet, and here’s the long-term performance of The Sequoia Fund managed by Bill Ruane until mid 2000s (for most of the life of the fund) –https://www.sequoiafund.com/performance . So value investing has been around a long-time, way before Fama-French, and Security Analysis was a staple of investors for a long-time (and still is for many).

But these examples don’t count, right? Survivorship bias, active managers, not like Fama-French.

In an interview shortly before his death – Graham indicated his shift from individual security selection, to stock screens and sorts on value criteria (similar to what many value index funds do today). http://www.grahamanddoddsville.net/word ... 201976.pdf

"Factor investing" is not just US small value. It includes the market, size, value, term and default re: the Fama-French article on "common risk factors in the returns on stocks and bonds". And also includes international markets, and extends to other factors -most prominently momentum and quality/profitability.

And international small value has done okay (3.8% higher annualized return) https://www.portfoliovisualizer.com/bac ... ion2_2=100
And is not just a 2001-03 phenomenon https://www.portfoliovisualizer.com/bac ... ion2_2=100
But this doesn’t count, right? Not US focused.

And then we have quality and momentum? Here are the iShares USA Quality and USA Momentum fund performance since inception.
https://www.portfoliovisualizer.com/bac ... ion3_3=100

But these don’t count either, right? Not US small value and other momentum funds haven't performed as well.

Apologies for the slight cynicism (don't count, right?) – but we tend to find what we look for [confirmation bias]. Market enthusiast look for evidence (e.g. US Small Value ex-periods when small value has done well such as 2001-03), and portfolios that have not performed relatively well to support their view, and those who tilt away from the market look for evidence supporting their view (international markets, longer time periods etc). That is why these conversations don’t really go anywhere. I fully admit that I am also susceptible to confirmation bias (a human characteristic). I think one area where there is agreement is costs matter.

For those who tilt - it is a long-term proposition - need to stay the course. For those who don't and just hold the market portfolio - it is also a long-term proposition - need to stay the course (as Fama indicated earlier "getting a positive equity premium (of any size) is highly likely only for holding periods of 35 years (an investment lifetime) or more." https://famafrench.dimensional.com/ques ... uzzle.aspx ).

Obviously no guarantees.
.
Last edited by Robert T on Mon Sep 14, 2020 12:39 pm, edited 2 times in total.
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Re: AQR still singing the same song

Post by PicassoSparks »

The DFA one is interesting because if you’re an accumulator, it outperforms until March 2020 and then they end up reversing position.

https://www.portfoliovisualizer.com/bac ... ion13_2=30

And if you started in 2002 instead of 2001 you now have substantially less money.
https://www.portfoliovisualizer.com/bac ... ion13_2=30
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Re: AQR still singing the same song

Post by 000 »

Robert T wrote: Mon Sep 14, 2020 5:55 am .
David Booth of DFA published this article in April 2001 http://www.prudentllc.com/sevg/PDFs/Ind ... xFunds.pdf
Here’s the article's all equity ‘balanced’ strategy performance since May 2001 https://www.portfoliovisualizer.com/bac ... ion13_2=30

But this one doesn’t count, right (because it had higher return and Sharpe, is too complex, and included 2001-03)?
No, I am willing to accept this as an example of a factor promoted portfolio that worked out. It counts. The trouble is, as with picking active funds, in knowing which promoted portfolios will do better. I'm sure many other factor promoted portfolios didn't. Another trouble is knowing what the real risks are.
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Re: AQR still singing the same song

Post by nisiprius »

I've posted an updated review here of how the 48 AQR funds I looked at in 2018 have performed, since inception, relative to the benchmarks AQR chose to compare them to.
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Re: AQR still singing the same song

Post by MotoTrojan »

000 wrote: Sat Sep 12, 2020 6:46 pm

Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Ex-US yes. In the US, DFSVX enjoyed a decade+ long run WELL ahead of the S&P500, only succumbing in the recent 2-year size/value drawdown.
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Re: AQR still singing the same song

Post by 000 »

MotoTrojan wrote: Tue Sep 15, 2020 8:52 pm
000 wrote: Sat Sep 12, 2020 6:46 pm

Question for factorheads: has any well publicized factor strategy offered non-trivial outperformance after publication so far?

Edit: in a real factor fund suggested by the publicizer relative to a real index fund.
Ex-US yes. In the US, DFSVX enjoyed a decade+ long run WELL ahead of the S&P500, only succumbing in the recent 2-year size/value drawdown.
Did a real factor publicizer suggest a 100% DFSVX portfolio as a replacement for 100% S&P 500?
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Re: AQR still singing the same song

Post by Fryxell »

Robert T wrote: Mon Sep 14, 2020 5:55 am Ben Graham’s Security Analysis was published in 1934 – prominent students of Graham (on value investing) were Warren Buffet and Bill Ruane who Warran Buffet met in Ben Graham’s class. We know the long-term performance of Buffet, and here’s the long-term performance of The Sequoia Fund managed by Bill Ruane until mid 2000s (for most of the life of the fund) –https://www.sequoiafund.com/performance . So value investing has been around a long-time, way before Fama-French, and Security Analysis was a staple of investors for a long-time (and still is for many).
Graham was also aware of the quality, momentum, and size factors, though not necessarily by those names. I think he referred to momentum as trending. He advocated investing in quality value companies. And he advised against small companies because of their higher risk; though if memory serves me he acknowledged their potential for higher return.

So these five factors have been known since at least the 30s (there are actually earlier references in other texts). They just weren’t analyzed in a mathematically systematic manner. The low volatility factor is the only one that seems to be more recent, but more recently I’ve seen some references to this one going back decades.

The value, momentum, and quality factors are, in a sense, observable to unsophisticated market participants, and have likely been known since the beginning of markets. Value: An unsophisticated participant can observe that if he had bought stocks at the troughs, his returns would be greater. Momentum: An unsophisticated participant can observe that stocks that have recently gone up tend to keep going up, and that he could increase returns by buying these ‘winners.’ Quality: An unsophisticated participant can observe that companies with solid finances are less likely to go bankrupt, and that if he had avoided the companies that went bankrupt, his returns would be higher.
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Re: AQR still singing the same song

Post by 000 »

Fryxell wrote: Wed Sep 16, 2020 12:37 am
Robert T wrote: Mon Sep 14, 2020 5:55 am Ben Graham’s Security Analysis was published in 1934 – prominent students of Graham (on value investing) were Warren Buffet and Bill Ruane who Warran Buffet met in Ben Graham’s class. We know the long-term performance of Buffet, and here’s the long-term performance of The Sequoia Fund managed by Bill Ruane until mid 2000s (for most of the life of the fund) –https://www.sequoiafund.com/performance . So value investing has been around a long-time, way before Fama-French, and Security Analysis was a staple of investors for a long-time (and still is for many).
Graham was also aware of the quality, momentum, and size factors, though not necessarily by those names. I think he referred to momentum as trending. He advocated investing in quality value companies. And he advised against small companies because of their higher risk; though if memory serves me he acknowledged their potential for higher return.

So these five factors have been known since at least the 30s (there are actually earlier references in other texts). They just weren’t analyzed in a mathematically systematic manner. The low volatility factor is the only one that seems to be more recent, but more recently I’ve seen some references to this one going back decades.

The value, momentum, and quality factors are, in a sense, observable to unsophisticated market participants, and have likely been known since the beginning of markets. Value: An unsophisticated participant can observe that if he had bought stocks at the troughs, his returns would be greater. Momentum: An unsophisticated participant can observe that stocks that have recently gone up tend to keep going up, and that he could increase returns by buying these ‘winners.’ Quality: An unsophisticated participant can observe that companies with solid finances are less likely to go bankrupt, and that if he had avoided the companies that went bankrupt, his returns would be higher.
Don't value, momentum, and quality kind of contradict each other? :D
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Re: AQR still singing the same song

Post by Fryxell »

000 wrote: Wed Sep 16, 2020 12:41 am Don't value, momentum, and quality kind of contradict each other? :D
It is true that very few stocks have both value and momentum characteristics (though they do exist).

That said, value and momentum operate on different timescales, which is why they can both have premiums. Momentum is a shorter-term effect. And you can definitely have quality companies that have value or momentum characteristics. Apple was a high-quality value company not long ago by some valuation metrics. There are value companies that have monopolies and huge moats. And many of these growth tech companies are also high quality.
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Re: AQR still singing the same song

Post by Fryxell »

And to follow up on my own post: Value and momentum have been observed in markets other than the stock market, such as commodity markets or currency markets.
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Re: AQR still singing the same song

Post by 000 »

Fryxell wrote: Wed Sep 16, 2020 12:59 am
000 wrote: Wed Sep 16, 2020 12:41 am Don't value, momentum, and quality kind of contradict each other? :D
It is true that very few stocks have both value and momentum characteristics (though they do exist).

That said, value and momentum operate on different timescales, which is why they can both have premiums. Momentum is a shorter-term effect. And you can definitely have quality companies that have value or momentum characteristics. Apple was a high-quality value company not long ago by some valuation metrics. There are value companies that have monopolies and huge moats. And many of these growth tech companies are also high quality.
Follow-up: what distinguishes momentum from technical analysis?
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Re: AQR still singing the same song

Post by All Seasons »

000 wrote: Wed Sep 16, 2020 1:08 am
Follow-up: what distinguishes momentum from technical analysis?
Heh. Nothing.

Not even traditional academic theory in finance can escape technical analysis. Take a concept that's as simple and commonplace as beta for instance. If beta is useful as any kind indicator of a stock's expected returns or price volatility then even the use of beta could be considered a kind of technical analysis.

Take from Investopedia:
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Beta is a stock's sensitivity to market volatility. That, to me, sounds like it could easily fit into the above definition. :)
The market portfolio is always a legitimate portfolio.
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Re: AQR still singing the same song

Post by rkhusky »

All Seasons wrote: Wed Sep 16, 2020 1:38 am Not even traditional academic theory in finance can escape technical analysis. Take a concept that's as simple and commonplace as beta for instance. If beta is useful as any kind indicator of a stock's expected returns or price volatility then even the use of beta could be considered a kind of technical analysis.

Take from Investopedia:
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Beta is a stock's sensitivity to market volatility. That, to me, sounds like it could easily fit into the above definition. :)
Technical analysis involves timing, i.e. studying signals as a function of time. Calculating Beta does not involve timing.
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Re: AQR still singing the same song

Post by nisiprius »

000 wrote: Wed Sep 16, 2020 1:08 am...Follow-up: what distinguishes momentum from technical analysis?...
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Re: AQR still singing the same song

Post by Angst »

Fryxell wrote: Wed Sep 16, 2020 12:59 am
000 wrote: Wed Sep 16, 2020 12:41 am Don't value, momentum, and quality kind of contradict each other? :D
It is true that very few stocks have both value and momentum characteristics (though they do exist).
And there are also some that have both value and negative momentum! We don't generally like those.
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Re: AQR still singing the same song

Post by Steve Reading »

000 wrote: Wed Sep 16, 2020 1:08 am
Fryxell wrote: Wed Sep 16, 2020 12:59 am
000 wrote: Wed Sep 16, 2020 12:41 am Don't value, momentum, and quality kind of contradict each other? :D
It is true that very few stocks have both value and momentum characteristics (though they do exist).

That said, value and momentum operate on different timescales, which is why they can both have premiums. Momentum is a shorter-term effect. And you can definitely have quality companies that have value or momentum characteristics. Apple was a high-quality value company not long ago by some valuation metrics. There are value companies that have monopolies and huge moats. And many of these growth tech companies are also high quality.
Follow-up: what distinguishes momentum from technical analysis?
They're completely different. Technical analysis (TA) looks at the rebounds and sell-offs of an asset in the past to figure out its resistance and support points. It buys when it hits support or break out resistance.

Momentum is about buying the stocks that did well recently.
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Re: AQR still singing the same song

Post by 000 »

Steve Reading wrote: Wed Sep 16, 2020 10:02 am They're completely different. Technical analysis (TA) looks at the rebounds and sell-offs of an asset in the past to figure out its resistance and support points. It buys when it hits support or break out resistance.

Momentum is about buying the stocks that did well recently.
Are they though? They are both used to make an investment decision based on recent price history, no?
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Re: AQR still singing the same song

Post by Steve Reading »

000 wrote: Wed Sep 16, 2020 10:06 am
Steve Reading wrote: Wed Sep 16, 2020 10:02 am They're completely different. Technical analysis (TA) looks at the rebounds and sell-offs of an asset in the past to figure out its resistance and support points. It buys when it hits support or break out resistance.

Momentum is about buying the stocks that did well recently.
Are they though? They are both used to make an investment decision based on recent price history, no?
Yes, in fact they're so different that a technical analyst might be selling the stocks that a momentum fund might be buying and vice-versa.
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Re: AQR still singing the same song

Post by wickywack »

One thing that fascinates me about QSPIX ( I think AQR's most discussed fund ) is not is recent underperformance, but its forward claims and what ( I think) that actually should mean for portfolio construction if the claims are accepted.

When it came out, the expectation was:
* equity like returns
* half the volatility of equities
* no correlation with equities or bonds

Some fairly smart folks seem confident of the math here.

That would be remarkable. Remarkable enough, that I don't think QSPIX is a diversifier anymore but actual the foundation of a portfolio - i.e., use stocks and bond to diversify from a QSPIX portfolio rather than the other way around (at least for tax advantaged accounts).

In fact, if I throw this at portfolio visualizer and ask it optimize a traditional 60/40 stock bond portfolio + QSPIX for return at a sufficiently high volatility, it suggests ... 100% QSPIX.

Even at lower target volatilities, QSPIX is the biggest suggested slice.

Do folks who are still confident on QSPIX going forward actually allocate that heavily to it? If not, why not?
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Re: AQR still singing the same song

Post by permport »

rkhusky wrote: Wed Sep 16, 2020 7:04 am
Technical analysis involves timing, i.e. studying signals as a function of time. Calculating Beta does not involve timing.
Beta is calculated over a time period. It's absolutely a function of time.

And not all technical analysis is about precise timing either.
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Re: AQR still singing the same song

Post by 000 »

Steve Reading wrote: Wed Sep 16, 2020 10:32 am
000 wrote: Wed Sep 16, 2020 10:06 am
Steve Reading wrote: Wed Sep 16, 2020 10:02 am They're completely different. Technical analysis (TA) looks at the rebounds and sell-offs of an asset in the past to figure out its resistance and support points. It buys when it hits support or break out resistance.

Momentum is about buying the stocks that did well recently.
Are they though? They are both used to make an investment decision based on recent price history, no?
Yes, in fact they're so different that a technical analyst might be selling the stocks that a momentum fund might be buying and vice-versa.
I was referring to both lacking a connection to any kind of fundamental asset valuation.
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Re: AQR still singing the same song

Post by rkhusky »

permport wrote: Wed Sep 16, 2020 5:12 pm
rkhusky wrote: Wed Sep 16, 2020 7:04 am
Technical analysis involves timing, i.e. studying signals as a function of time. Calculating Beta does not involve timing.
Beta is calculated over a time period. It's absolutely a function of time.

And not all technical analysis is about precise timing either.
Sure, the beta of an investment fluctuates over time, but I have not heard of the use of the beta of a fund to make investment timing decisions.
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Re: AQR still singing the same song

Post by HomerJ »

wickywack wrote: Wed Sep 16, 2020 4:58 pm One thing that fascinates me about QSPIX ( I think AQR's most discussed fund ) is not is recent underperformance, but its forward claims and what ( I think) that actually should mean for portfolio construction if the claims are accepted.

When it came out, the expectation was:
* equity like returns
* half the volatility of equities
* no correlation with equities or bonds

Some fairly smart folks seem confident of the math here.

That would be remarkable. Remarkable enough, that I don't think QSPIX is a diversifier anymore but actual the foundation of a portfolio - i.e., use stocks and bond to diversify from a QSPIX portfolio rather than the other way around (at least for tax advantaged accounts).

In fact, if I throw this at portfolio visualizer and ask it optimize a traditional 60/40 stock bond portfolio + QSPIX for return at a sufficiently high volatility, it suggests ... 100% QSPIX.

Even at lower target volatilities, QSPIX is the biggest suggested slice.

Do folks who are still confident on QSPIX going forward actually allocate that heavily to it? If not, why not?
Why would you accept it's forward claims if it's past claims have been false?
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Re: AQR still singing the same song

Post by Elysium »

wickywack wrote: Wed Sep 16, 2020 4:58 pm One thing that fascinates me about QSPIX ( I think AQR's most discussed fund ) is not is recent underperformance, but its forward claims and what ( I think) that actually should mean for portfolio construction if the claims are accepted.

When it came out, the expectation was:
* equity like returns
* half the volatility of equities
* no correlation with equities or bonds

Some fairly smart folks seem confident of the math here.

That would be remarkable. Remarkable enough, that I don't think QSPIX is a diversifier anymore but actual the foundation of a portfolio - i.e., use stocks and bond to diversify from a QSPIX portfolio rather than the other way around (at least for tax advantaged accounts).

In fact, if I throw this at portfolio visualizer and ask it optimize a traditional 60/40 stock bond portfolio + QSPIX for return at a sufficiently high volatility, it suggests ... 100% QSPIX.

Even at lower target volatilities, QSPIX is the biggest suggested slice.

Do folks who are still confident on QSPIX going forward actually allocate that heavily to it? If not, why not?
wickywack: Smart people stay away from investments that have proven to be nothing but losing money instead of hoping for something different to happen. There is no need when the market returns have been enough. As John C. Bogle said, the "enemy of a good plan is the pursuit of the perfect plan".
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Re: AQR still singing the same song

Post by Ketawa »

Fun to see all the people who endlessly bash factor investing in this thread with the same tired arguments. Meanwhile, I'm happily plugging along with my AQR funds, which I have held since 2014. My entire IRA is AQR funds. QSMLX has outperformed every other noteworthy small cap value fund since its inception, including VBR and IJS: link.
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