More Evidence Against Factor Investing

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Logan Roy
Posts: 1891
Joined: Sun May 29, 2022 10:15 am

Re: More Evidence Against Factor Investing

Post by Logan Roy »

rkhusky wrote: Wed Mar 27, 2024 12:41 pm Since we can’t predict the future, ie know what the market is going to do at a particular time in the future, a higher amount of volatility makes it more probable that there will be a larger downturn when we don’t want it in the future.

I would also guess that a higher daily volatility is correlated with a higher monthly volatility which is correlated with a higher yearly volatility which is correlated with a higher 10-year volatility.
I think that's right, maybe 90% of the time? .. There are assets that can appear low vol, but have existential risks – like ZDP shares. Or be high in volatility, but less risky than money in the bank, like LT treasuries.

But I think when modelling a portfolio – especially if a regular withdrawal rate is required, or you're using some kind of leverage – it might be a 1 in 50 year event when correlations suddenly go to 1, and volatility comes along. So I think risk really needs to be modelled on a curve.
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GRP
Posts: 391
Joined: Wed Nov 22, 2017 4:35 pm

Re: More Evidence Against Factor Investing

Post by GRP »

Regardless of whether factors "work" or not, if you simply pick a strategy and stick with it decade by decade, you are likely to do just fine.
Almost nothing turns out as expected.
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Logan Roy wrote: Wed Mar 27, 2024 12:37 pm
comeinvest wrote: Tue Mar 26, 2024 4:38 pm Leverage can be achieved in a brokerage account at near zero cost and near risk-free rates these days, so no private equity needed for that purpose. Infrastructure I have via some publicly listed companies and partnerships.

Thanks again, your asset allocation is intriguing and there is nothing wrong with it, and you obviously put a lot of thought into it; I would think its expected risk and return are probably not measurably worse than the equity index in the long run; probably a tie, but at slightly higher expense ratio. But I think it's too complicated, over-thought and over-engineered, and it might have exposure to unintended biases and risks like sector tilts, while some of the perceived additional diversification attributes might be illusions. Smart people tend to outsmart themselves in finance. Due to the nature of unknown probability spaces and the unknown future, it's naturally hard to "prove" anything or to argue with backtesting; but with the information at hand, I personally would rather go with a leveraged equity index (perhaps with some equity "factor" sprinkles) + intermediate-term and short-term treasuries portfolio, basically mHFEA, with leverage on a glidepath. When I say equity index I mean global equity markets, which I think is a free diversification lunch (other major discussion in the international thread).
Just on this. I meant to say, I would feel exposed having anything approaching 25% of my net worth exposed to a derivative instrument on a brokerage account (being that that's the kind of leverage they typically offer). There are usually hidden costs – so the cost of a margin loan is often in Junk debt territory. Stop Losses aren't guaranteed, unless you want to pay a lot for insurance (so you can owe unlimited amounts).

Retail investors leveraging trades on platforms with 80% loss rates are not going to get intra-bank-like lending rates, by a long shot. And I wouldn't like a large allocation to a Daily leveraged ETF – a) because they can go bankrupt; and b) because the daily leverage maths is a wildcard. The wrong sequence of returns can leverage you the wrong way, and that's the kind of tail risk you need to know about.
Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm With Private Equity and Infrastructure, they're getting deals on leverage retail investors will never get. They're investing a lot in risk management and insurance (whole sectors rely on these funds not imploding). You can spread risk across funds and firms. And they tend to leverage on very long-term contracts – in the case of infrastructure, a lot of these funds were set up when we had near-zero rates, and are leveraged on those terms for the next 20+ years .. An additional benefit is that I'm not just leveraging the market exposure I've already got – so if there's another Tech crash, I'm not leveraged on the downside. My VWRL will drop, but my leveraged funds are in different businesses and sectors .. Also, I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms.
"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Nathan Drake wrote: Wed Mar 27, 2024 9:08 am
comeinvest wrote: Wed Mar 27, 2024 4:48 am
Nathan Drake wrote: Wed Mar 27, 2024 1:46 am
comeinvest wrote: Wed Mar 27, 2024 12:07 am
Nathan Drake wrote: Sat Mar 23, 2024 10:22 pm DFA has a good recent article on this topic:

https://www.dimensional.com/us-en/insig ... nd-present



Image

The chart does a good job highlighting that the premium is actually quite persistent (again, roughly 80% win rate), but obviously there are periods where it doesn't work. This is over a long horizon (20 years), which seems about right to judge a strategy. Sometimes it won't work, but often it does. And remember that this chart is for the US market.

The fact that we are getting into uncharted territory with a 20+ year period of rough parity makes me more bullish about this investment class given what has historically occurred. You can't time when it will shift, but patient investors tend to be awarded given the current valuation spreads.
Unfortunately they don't show the risk-adjusted returns, and/or whether the returns were independent of the total market. The fact that the 20-year rolling returns were mostly above zero means little. We all know that small caps higher beta and therefore higher expected returns.
That’s the rolling premium, not total return
Understood. Rolling premium > 0 means consistently higher returns than the index over 20-year periods, which I guess is what they wanted to show. Like I said, that means little. Were risk-adjusted returns higher too? You can leverage the index for example 1.2x and will probably get rolling outperformance charts similar to the one above. EDIT: Have to correct myself. Looks like the average outperformance of SCV per the above chart (ca. 4% p.a.?) is higher than that of a leveraged total market index. But still, risk-adjusted returns should be shown.
I remember though seeing someone demonstrate in another BH thread a while ago that SCV behaves very similar in terms of risk and performance to a ca. 1.2x leveraged large cap index. Actually I can show it right here: https://www.portfoliovisualizer.com/bac ... m2TdmfJJOJ
Something doesn't add up, or I'm misunderstanding the above chart.

portfolio 1: DFSVX / portfolio 2: 120% VFINX / portfolio 3: 100% VFINX

Image
Leverage adds cost.

You’re also doubling down on the same type of risk, rather than diversifying your sources of risk.

While sharpe ratios differ over various periods, most factor investors would argue that improved risk reduction isn’t an expectation (although likely happens during periods of high premia)

The 2000 decade for instance had a much higher sharpe ratio than the market
Cost of leverage is already reflected in my charts.
I still cannot reconcile the two diagrams. Is the SCV premium more 4% or more like 1% p.a.?
Probably the explanation is that my PV charts starts in 1994, for data that is reflected in the DFA chart at 2014+ for the 20-year rolling returns. The size of the premium crashed after 1994.
Logan Roy
Posts: 1891
Joined: Sun May 29, 2022 10:15 am

Re: More Evidence Against Factor Investing

Post by Logan Roy »

comeinvest wrote: Mon Apr 01, 2024 10:43 pm
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm
comeinvest wrote: Tue Mar 26, 2024 4:38 pm Leverage can be achieved in a brokerage account at near zero cost and near risk-free rates these days, so no private equity needed for that purpose. Infrastructure I have via some publicly listed companies and partnerships.

Thanks again, your asset allocation is intriguing and there is nothing wrong with it, and you obviously put a lot of thought into it; I would think its expected risk and return are probably not measurably worse than the equity index in the long run; probably a tie, but at slightly higher expense ratio. But I think it's too complicated, over-thought and over-engineered, and it might have exposure to unintended biases and risks like sector tilts, while some of the perceived additional diversification attributes might be illusions. Smart people tend to outsmart themselves in finance. Due to the nature of unknown probability spaces and the unknown future, it's naturally hard to "prove" anything or to argue with backtesting; but with the information at hand, I personally would rather go with a leveraged equity index (perhaps with some equity "factor" sprinkles) + intermediate-term and short-term treasuries portfolio, basically mHFEA, with leverage on a glidepath. When I say equity index I mean global equity markets, which I think is a free diversification lunch (other major discussion in the international thread).
Just on this. I meant to say, I would feel exposed having anything approaching 25% of my net worth exposed to a derivative instrument on a brokerage account (being that that's the kind of leverage they typically offer). There are usually hidden costs – so the cost of a margin loan is often in Junk debt territory. Stop Losses aren't guaranteed, unless you want to pay a lot for insurance (so you can owe unlimited amounts).

Retail investors leveraging trades on platforms with 80% loss rates are not going to get intra-bank-like lending rates, by a long shot. And I wouldn't like a large allocation to a Daily leveraged ETF – a) because they can go bankrupt; and b) because the daily leverage maths is a wildcard. The wrong sequence of returns can leverage you the wrong way, and that's the kind of tail risk you need to know about.
Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm With Private Equity and Infrastructure, they're getting deals on leverage retail investors will never get. They're investing a lot in risk management and insurance (whole sectors rely on these funds not imploding). You can spread risk across funds and firms. And they tend to leverage on very long-term contracts – in the case of infrastructure, a lot of these funds were set up when we had near-zero rates, and are leveraged on those terms for the next 20+ years .. An additional benefit is that I'm not just leveraging the market exposure I've already got – so if there's another Tech crash, I'm not leveraged on the downside. My VWRL will drop, but my leveraged funds are in different businesses and sectors .. Also, I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms.
"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Logan Roy wrote: Tue Apr 02, 2024 10:43 am
comeinvest wrote: Mon Apr 01, 2024 10:43 pm
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm
comeinvest wrote: Tue Mar 26, 2024 4:38 pm Leverage can be achieved in a brokerage account at near zero cost and near risk-free rates these days, so no private equity needed for that purpose. Infrastructure I have via some publicly listed companies and partnerships.

Thanks again, your asset allocation is intriguing and there is nothing wrong with it, and you obviously put a lot of thought into it; I would think its expected risk and return are probably not measurably worse than the equity index in the long run; probably a tie, but at slightly higher expense ratio. But I think it's too complicated, over-thought and over-engineered, and it might have exposure to unintended biases and risks like sector tilts, while some of the perceived additional diversification attributes might be illusions. Smart people tend to outsmart themselves in finance. Due to the nature of unknown probability spaces and the unknown future, it's naturally hard to "prove" anything or to argue with backtesting; but with the information at hand, I personally would rather go with a leveraged equity index (perhaps with some equity "factor" sprinkles) + intermediate-term and short-term treasuries portfolio, basically mHFEA, with leverage on a glidepath. When I say equity index I mean global equity markets, which I think is a free diversification lunch (other major discussion in the international thread).
Just on this. I meant to say, I would feel exposed having anything approaching 25% of my net worth exposed to a derivative instrument on a brokerage account (being that that's the kind of leverage they typically offer). There are usually hidden costs – so the cost of a margin loan is often in Junk debt territory. Stop Losses aren't guaranteed, unless you want to pay a lot for insurance (so you can owe unlimited amounts).

Retail investors leveraging trades on platforms with 80% loss rates are not going to get intra-bank-like lending rates, by a long shot. And I wouldn't like a large allocation to a Daily leveraged ETF – a) because they can go bankrupt; and b) because the daily leverage maths is a wildcard. The wrong sequence of returns can leverage you the wrong way, and that's the kind of tail risk you need to know about.
Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm With Private Equity and Infrastructure, they're getting deals on leverage retail investors will never get. They're investing a lot in risk management and insurance (whole sectors rely on these funds not imploding). You can spread risk across funds and firms. And they tend to leverage on very long-term contracts – in the case of infrastructure, a lot of these funds were set up when we had near-zero rates, and are leveraged on those terms for the next 20+ years .. An additional benefit is that I'm not just leveraging the market exposure I've already got – so if there's another Tech crash, I'm not leveraged on the downside. My VWRL will drop, but my leveraged funds are in different businesses and sectors .. Also, I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms.
"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
Logan Roy
Posts: 1891
Joined: Sun May 29, 2022 10:15 am

Re: More Evidence Against Factor Investing

Post by Logan Roy »

comeinvest wrote: Tue Apr 02, 2024 1:04 pm
Logan Roy wrote: Tue Apr 02, 2024 10:43 am
comeinvest wrote: Mon Apr 01, 2024 10:43 pm
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm
comeinvest wrote: Tue Mar 26, 2024 4:38 pm Leverage can be achieved in a brokerage account at near zero cost and near risk-free rates these days, so no private equity needed for that purpose. Infrastructure I have via some publicly listed companies and partnerships.

Thanks again, your asset allocation is intriguing and there is nothing wrong with it, and you obviously put a lot of thought into it; I would think its expected risk and return are probably not measurably worse than the equity index in the long run; probably a tie, but at slightly higher expense ratio. But I think it's too complicated, over-thought and over-engineered, and it might have exposure to unintended biases and risks like sector tilts, while some of the perceived additional diversification attributes might be illusions. Smart people tend to outsmart themselves in finance. Due to the nature of unknown probability spaces and the unknown future, it's naturally hard to "prove" anything or to argue with backtesting; but with the information at hand, I personally would rather go with a leveraged equity index (perhaps with some equity "factor" sprinkles) + intermediate-term and short-term treasuries portfolio, basically mHFEA, with leverage on a glidepath. When I say equity index I mean global equity markets, which I think is a free diversification lunch (other major discussion in the international thread).
Just on this. I meant to say, I would feel exposed having anything approaching 25% of my net worth exposed to a derivative instrument on a brokerage account (being that that's the kind of leverage they typically offer). There are usually hidden costs – so the cost of a margin loan is often in Junk debt territory. Stop Losses aren't guaranteed, unless you want to pay a lot for insurance (so you can owe unlimited amounts).

Retail investors leveraging trades on platforms with 80% loss rates are not going to get intra-bank-like lending rates, by a long shot. And I wouldn't like a large allocation to a Daily leveraged ETF – a) because they can go bankrupt; and b) because the daily leverage maths is a wildcard. The wrong sequence of returns can leverage you the wrong way, and that's the kind of tail risk you need to know about.
Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm With Private Equity and Infrastructure, they're getting deals on leverage retail investors will never get. They're investing a lot in risk management and insurance (whole sectors rely on these funds not imploding). You can spread risk across funds and firms. And they tend to leverage on very long-term contracts – in the case of infrastructure, a lot of these funds were set up when we had near-zero rates, and are leveraged on those terms for the next 20+ years .. An additional benefit is that I'm not just leveraging the market exposure I've already got – so if there's another Tech crash, I'm not leveraged on the downside. My VWRL will drop, but my leveraged funds are in different businesses and sectors .. Also, I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms.
"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
I don't recommend private equity and infrastructure to others, and have a hard time explaining how you should think about private equity to other investors – even advisors at decent firms. There's a PE fund I wish I'd been in (3i group), which is up 2,500% since the GFC. Two that have closed that did exceptionally well, that I held since the GFC .. One I've still got is HG Capital, and while I've not held it this long, it's up 7,000% since the mid-90s, and has been consistent (it knows its niche) .. The Hedgefundie strategy has not done those kinds of returns in the real world – and I don't think it's likely to .. I've seen far more impressive backtests that don't concern me as much. And you've got to remember, my approach is an approach multi-$billion endowments, sovereign wealth and pension funds employ. While the financial media makes crude comparisons to the S&P, and steers retail investors the wrong way at every turn. There's a big difference. These giant funds can't afford to make idiotic decisions and keep course-correcting.

Futures concern me infinitely more, because unless you can cover potential losses, all you've got is a betting slip. I'm still at a loss for how you use them safely for leveraged market exposure .. Daily leveraged ETFs .. A few years ago, everyone knew what 'daily leverage' meant – and it meant day trading .. I think they still even say in their literature: not suitable for holding overnight.

And recently, with the influx of clueless investors getting drawn into the post-stimulus rally, I think there have been more articles on how these are actually quite safe, effective ways to get leveraged market exposure .. But the sequence of returns risk is far too great to have 60% of your net worth in this kind of product .. You can even work out the chance of a leveraged ETF going bankrupt – and the thing people don't appreciate about investing is that as soon as you do something reckless, the risk event happens .. And that's because you could probably find 20-30 bad, leveraged strategies and products that have fallen by the wayside since the 1980s. But we only consider the ones that haven't (yet). That is a much greater bias than people realise.
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Logan Roy wrote: Tue Apr 02, 2024 2:45 pm
comeinvest wrote: Tue Apr 02, 2024 1:04 pm
Logan Roy wrote: Tue Apr 02, 2024 10:43 am
comeinvest wrote: Mon Apr 01, 2024 10:43 pm
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm

Just on this. I meant to say, I would feel exposed having anything approaching 25% of my net worth exposed to a derivative instrument on a brokerage account (being that that's the kind of leverage they typically offer). There are usually hidden costs – so the cost of a margin loan is often in Junk debt territory. Stop Losses aren't guaranteed, unless you want to pay a lot for insurance (so you can owe unlimited amounts).

Retail investors leveraging trades on platforms with 80% loss rates are not going to get intra-bank-like lending rates, by a long shot. And I wouldn't like a large allocation to a Daily leveraged ETF – a) because they can go bankrupt; and b) because the daily leverage maths is a wildcard. The wrong sequence of returns can leverage you the wrong way, and that's the kind of tail risk you need to know about.
Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.
Logan Roy wrote: Wed Mar 27, 2024 12:37 pm With Private Equity and Infrastructure, they're getting deals on leverage retail investors will never get. They're investing a lot in risk management and insurance (whole sectors rely on these funds not imploding). You can spread risk across funds and firms. And they tend to leverage on very long-term contracts – in the case of infrastructure, a lot of these funds were set up when we had near-zero rates, and are leveraged on those terms for the next 20+ years .. An additional benefit is that I'm not just leveraging the market exposure I've already got – so if there's another Tech crash, I'm not leveraged on the downside. My VWRL will drop, but my leveraged funds are in different businesses and sectors .. Also, I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms.
"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
I don't recommend private equity and infrastructure to others, and have a hard time explaining how you should think about private equity to other investors – even advisors at decent firms. There's a PE fund I wish I'd been in (3i group), which is up 2,500% since the GFC. Two that have closed that did exceptionally well, that I held since the GFC .. One I've still got is HG Capital, and while I've not held it this long, it's up 7,000% since the mid-90s, and has been consistent (it knows its niche) .. The Hedgefundie strategy has not done those kinds of returns in the real world – and I don't think it's likely to .. I've seen far more impressive backtests that don't concern me as much. And you've got to remember, my approach is an approach multi-$billion endowments, sovereign wealth and pension funds employ. While the financial media makes crude comparisons to the S&P, and steers retail investors the wrong way at every turn. There's a big difference. These giant funds can't afford to make idiotic decisions and keep course-correcting.

Futures concern me infinitely more, because unless you can cover potential losses, all you've got is a betting slip. I'm still at a loss for how you use them safely for leveraged market exposure .. Daily leveraged ETFs .. A few years ago, everyone knew what 'daily leverage' meant – and it meant day trading .. I think they still even say in their literature: not suitable for holding overnight.

And recently, with the influx of clueless investors getting drawn into the post-stimulus rally, I think there have been more articles on how these are actually quite safe, effective ways to get leveraged market exposure .. But the sequence of returns risk is far too great to have 60% of your net worth in this kind of product .. You can even work out the chance of a leveraged ETF going bankrupt – and the thing people don't appreciate about investing is that as soon as you do something reckless, the risk event happens .. And that's because you could probably find 20-30 bad, leveraged strategies and products that have fallen by the wayside since the 1980s. But we only consider the ones that haven't (yet). That is a much greater bias than people realise.
I'm sorry but you are not demonstrating anything. If it's hard to impossible to explain let alone to rationalize why I should stuff my money into private stuff, then I would say there is a possibility that there is no case.

I told you the facts about LETFs (which I'm not even using), which you can replicate if you read some previous threads in this forum.

I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.

If a moderately leveraged public equities + treasuries strategy goes bust or has a major drawdown, then your private "stuff" (lol) that is leveraged on various levels will likely almost certainly have similar issues, and there are numerous examples of private funds locking up and/or "quietly" disappearing.

For whatever private fund that had a 2,500% return since the GFC (not a major accomplishment for some leveraged strategy that started at the very bottom of the deepest drawdown in modern history, and after selection bias), there are numerous other private funds that "quietly" (lol) disappeared, and others that had dismal returns, and there are a number of equivalent, publicly traded operational, investment holding, or investment companies similarly diversified in some industry, that had similarly stellar returns.

There are numerous studies that show that upon rigorous examination, claims to returns, risk, or diversification in the glossy brochures of private investment vehicles, that use some of the buzzwords that you also used, are baloney. In fact I have not seen any substantiated evidence that those fee laden products do any good, although I spent a great deal of my life looking at and examining many of them.

I have seen no evidence from you that opaque and obscure private investments with the obvious operational, portfolio management, and liquidity headaches not to mention the fees, increase returns, increase diversification, or reduce risk vs. an equivalent implementation of the same underlying drivers of return with equivalent amount of leverage or risk using public, liquid, transparent, marginable securities in a brokerage account. Show me some substantiated evidence, and I'm in. Citing "authority" of "professionals", doing "what others do", hiding behind illiquidity and lack of marketable pricing, or using generic language and marketing buzzwords, don't impress or convince me. It's 2024, and we live in a world with free access to and with free flow of information.
Logan Roy
Posts: 1891
Joined: Sun May 29, 2022 10:15 am

Re: More Evidence Against Factor Investing

Post by Logan Roy »

comeinvest wrote: Tue Apr 02, 2024 3:32 pm
Logan Roy wrote: Tue Apr 02, 2024 2:45 pm
comeinvest wrote: Tue Apr 02, 2024 1:04 pm
Logan Roy wrote: Tue Apr 02, 2024 10:43 am
comeinvest wrote: Mon Apr 01, 2024 10:43 pm

Sorry for the delay as I was offline.
I use futures and box credit spreads for leverage. No hidden cost, and yes my cost of leverage is near intra-bank lending rates and near the risk-free rates (T-bills, term SOFR).
The daily leverage of LETFs is manageable and not a measurable detractor from returns; read the mHFEA thread to understand the details why. The main problem with LETFs is the fee. I don't use them.
I don't need complex and fee-laden products, let alone investment classes like private equity, just for leverage.



"they're getting deals on leverage retail investors will never get" - they would have to get rates below the risk-free rate, which is doubtful.
"You [they] can spread risk across funds and firms" - I too. My entire diversified asset portfolio backs the options (or futures) implied loan debt.
"they tend to leverage on very long-term contracts" - That would imply a large negative duration exposure, which comes with a large negative term premium, and relatively higher long-term risk-free rates (plus a spread). May or may not be advantageous depending on the target asset allocation. I have something similar via my home mortgage.
"I don't consider public stocks of infrastructure firms to be quite such effective diversifiers. We may have had 20 years of them producing similar returns, but they are ultimately different types of asset with different risks and terms." - Depending on initial public equity valuations, returns will probably be different in the short and medium term (not necessarily worse for public equities, for example with currently low public vs. private real estate valuations). Until I see evidence to the contrary, I assume that long-term NAV returns will be similar.

I want to say that I don't mean to destroy your belief in your asset allocation and asset choices. I'm just saying, a lot of what you are saying sounds similar to what I read my entire life in "glossy brochures" of product vendors and asset management firms; the language is generic and lacking factual details, making it hard to pinpoint the potential defects. I don't believe in any suggested benefits until I see substantiated evidence, which appears to be hard to come by.
I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
I don't recommend private equity and infrastructure to others, and have a hard time explaining how you should think about private equity to other investors – even advisors at decent firms. There's a PE fund I wish I'd been in (3i group), which is up 2,500% since the GFC. Two that have closed that did exceptionally well, that I held since the GFC .. One I've still got is HG Capital, and while I've not held it this long, it's up 7,000% since the mid-90s, and has been consistent (it knows its niche) .. The Hedgefundie strategy has not done those kinds of returns in the real world – and I don't think it's likely to .. I've seen far more impressive backtests that don't concern me as much. And you've got to remember, my approach is an approach multi-$billion endowments, sovereign wealth and pension funds employ. While the financial media makes crude comparisons to the S&P, and steers retail investors the wrong way at every turn. There's a big difference. These giant funds can't afford to make idiotic decisions and keep course-correcting.

Futures concern me infinitely more, because unless you can cover potential losses, all you've got is a betting slip. I'm still at a loss for how you use them safely for leveraged market exposure .. Daily leveraged ETFs .. A few years ago, everyone knew what 'daily leverage' meant – and it meant day trading .. I think they still even say in their literature: not suitable for holding overnight.

And recently, with the influx of clueless investors getting drawn into the post-stimulus rally, I think there have been more articles on how these are actually quite safe, effective ways to get leveraged market exposure .. But the sequence of returns risk is far too great to have 60% of your net worth in this kind of product .. You can even work out the chance of a leveraged ETF going bankrupt – and the thing people don't appreciate about investing is that as soon as you do something reckless, the risk event happens .. And that's because you could probably find 20-30 bad, leveraged strategies and products that have fallen by the wayside since the 1980s. But we only consider the ones that haven't (yet). That is a much greater bias than people realise.
I'm sorry but you are not demonstrating anything. If it's hard to impossible to explain let alone to rationalize why I should stuff my money into private stuff, then I would say there is a possibility that there is no case.

I told you the facts about LETFs (which I'm not even using), which you can replicate if you read some previous threads in this forum.

I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.

If a moderately leveraged public equities + treasuries strategy goes bust or has a major drawdown, then your private "stuff" (lol) that is leveraged on various levels will likely almost certainly have similar issues, and there are numerous examples of private funds locking up and/or "quietly" disappearing.

For whatever private fund that had a 2,500% return since the GFC (not a major accomplishment for some leveraged strategy that started at the very bottom of the deepest drawdown in modern history, and after selection bias), there are numerous other private funds that "quietly" (lol) disappeared, and others that had dismal returns, and there are a number of equivalent, publicly traded operational, investment holding, or investment companies similarly diversified in some industry, that had similarly stellar returns.

There are numerous studies that show that upon rigorous examination, claims to returns, risk, or diversification in the glossy brochures of private investment vehicles, that use some of the buzzwords that you also used, are baloney. In fact I have not seen any substantiated evidence that those fee laden products do any good, although I spent a great deal of my life looking at and examining many of them.

I have seen no evidence from you that opaque and obscure private investments with the obvious operational, portfolio management, and liquidity headaches not to mention the fees, increase returns, increase diversification, or reduce risk vs. an equivalent implementation of the same underlying drivers of return with equivalent amount of leverage or risk using public, liquid, transparent, marginable securities in a brokerage account. Show me some substantiated evidence, and I'm in. Citing "authority" of "professionals", doing "what others do", hiding behind illiquidity and lack of marketable pricing, or using generic language and marketing buzzwords, don't impress or convince me. It's 2024, and we live in a world with free access to and with free flow of information.
I keep asking you how you're using Futures safely, and you don't tell me. I think I've explained the basic problem twice, which is that no one's actually lending you money at intra-bank rates to bet on stocks – whoever's assuming the risk is taking their cut somewhere, and it might be in spreads. And the you can't leverage safely if you can't cover losses – which means having dry powder .. And if you can't explain how you're doing this (and if you can, maybe I am missing something), I'd assume you're doing something much riskier or costlier than you realise. (being that that's not uncommon)

I also explained that the threads on here, like Hedgefundie's, are not an education for me. They're more like cautionary tales. But I'm cautious when someone believes a whole asset class is pointless. It's a very detached, ideological way of thinking. And funds I'm mentioning, like HG Capital, publish their holdings and have public stock listings – so they're far from opaque.

https://hgcapital.com
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Logan Roy wrote: Wed Apr 03, 2024 8:07 pm
comeinvest wrote: Tue Apr 02, 2024 3:32 pm
Logan Roy wrote: Tue Apr 02, 2024 2:45 pm
comeinvest wrote: Tue Apr 02, 2024 1:04 pm
Logan Roy wrote: Tue Apr 02, 2024 10:43 am

I'd perhaps say the same for you advocating futures. I.e. interest costs are advertised as low, but you have to have enough cash to cover losses leveraged to the downside (which means having a cash drag on your leveraged market exposure), or a certain loss loses you all your capital (making it a bet), or you use Options to protect your position (where you're back to being hit on costs, usually with spreads).

I'm just not aware of a 'free lunch' with leverage. Someone's taking on the risk, and there is a market rate for that risk. The risk of getting the equivalent of a margin call is your enhanced tail risk. Otherwise you need to be able to cover the maximum loss, which is either going to be a drag on returns, or a more expensive form of hedging.

Afaic, daily leveraged ETFs are for day trading. It's not the friction costs, it's that the maths of daily leverage are a tail risk. So if you get a sequence of returns that skews larger returns on (say) down days, you can get situations where the market going up actually leverages losses to the downside. And it's not the mathematical outlier some suggest it is. It happened with a daily leveraged Chinese ETF not too long ago .. And again, if I'm running a large, leveraged portfolio, it's always the outlier risks that take those portfolios down. I felt the risk management side of the mHFEA thread was a disaster waiting to happen. And the fact (?) that strategy imploded so badly, so quickly after the thread was created (with stock bond correlations outside the range of the woefully inadequate period of market data HF decided to use) is the Sod's Law of investing. At every level, that was an appallingly bad strategy (even before the implementation – daily leveraged ETFs are not for serious people). LTCM is the case study. If you don't calculate your tail risk properly, it's just a matter of time until you implode .. The difference with institutional-grade private equity and infrastructure is they've got very serious incentive to model risk properly.
There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
I don't recommend private equity and infrastructure to others, and have a hard time explaining how you should think about private equity to other investors – even advisors at decent firms. There's a PE fund I wish I'd been in (3i group), which is up 2,500% since the GFC. Two that have closed that did exceptionally well, that I held since the GFC .. One I've still got is HG Capital, and while I've not held it this long, it's up 7,000% since the mid-90s, and has been consistent (it knows its niche) .. The Hedgefundie strategy has not done those kinds of returns in the real world – and I don't think it's likely to .. I've seen far more impressive backtests that don't concern me as much. And you've got to remember, my approach is an approach multi-$billion endowments, sovereign wealth and pension funds employ. While the financial media makes crude comparisons to the S&P, and steers retail investors the wrong way at every turn. There's a big difference. These giant funds can't afford to make idiotic decisions and keep course-correcting.

Futures concern me infinitely more, because unless you can cover potential losses, all you've got is a betting slip. I'm still at a loss for how you use them safely for leveraged market exposure .. Daily leveraged ETFs .. A few years ago, everyone knew what 'daily leverage' meant – and it meant day trading .. I think they still even say in their literature: not suitable for holding overnight.

And recently, with the influx of clueless investors getting drawn into the post-stimulus rally, I think there have been more articles on how these are actually quite safe, effective ways to get leveraged market exposure .. But the sequence of returns risk is far too great to have 60% of your net worth in this kind of product .. You can even work out the chance of a leveraged ETF going bankrupt – and the thing people don't appreciate about investing is that as soon as you do something reckless, the risk event happens .. And that's because you could probably find 20-30 bad, leveraged strategies and products that have fallen by the wayside since the 1980s. But we only consider the ones that haven't (yet). That is a much greater bias than people realise.
I'm sorry but you are not demonstrating anything. If it's hard to impossible to explain let alone to rationalize why I should stuff my money into private stuff, then I would say there is a possibility that there is no case.

I told you the facts about LETFs (which I'm not even using), which you can replicate if you read some previous threads in this forum.

I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.

If a moderately leveraged public equities + treasuries strategy goes bust or has a major drawdown, then your private "stuff" (lol) that is leveraged on various levels will likely almost certainly have similar issues, and there are numerous examples of private funds locking up and/or "quietly" disappearing.

For whatever private fund that had a 2,500% return since the GFC (not a major accomplishment for some leveraged strategy that started at the very bottom of the deepest drawdown in modern history, and after selection bias), there are numerous other private funds that "quietly" (lol) disappeared, and others that had dismal returns, and there are a number of equivalent, publicly traded operational, investment holding, or investment companies similarly diversified in some industry, that had similarly stellar returns.

There are numerous studies that show that upon rigorous examination, claims to returns, risk, or diversification in the glossy brochures of private investment vehicles, that use some of the buzzwords that you also used, are baloney. In fact I have not seen any substantiated evidence that those fee laden products do any good, although I spent a great deal of my life looking at and examining many of them.

I have seen no evidence from you that opaque and obscure private investments with the obvious operational, portfolio management, and liquidity headaches not to mention the fees, increase returns, increase diversification, or reduce risk vs. an equivalent implementation of the same underlying drivers of return with equivalent amount of leverage or risk using public, liquid, transparent, marginable securities in a brokerage account. Show me some substantiated evidence, and I'm in. Citing "authority" of "professionals", doing "what others do", hiding behind illiquidity and lack of marketable pricing, or using generic language and marketing buzzwords, don't impress or convince me. It's 2024, and we live in a world with free access to and with free flow of information.
I keep asking you how you're using Futures safely, and you don't tell me. I think I've explained the basic problem twice, which is that no one's actually lending you money at intra-bank rates to bet on stocks – whoever's assuming the risk is taking their cut somewhere, and it might be in spreads. And the you can't leverage safely if you can't cover losses – which means having dry powder .. And if you can't explain how you're doing this (and if you can, maybe I am missing something), I'd assume you're doing something much riskier or costlier than you realise. (being that that's not uncommon)

I also explained that the threads on here, like Hedgefundie's, are not an education for me. They're more like cautionary tales. But I'm cautious when someone believes a whole asset class is pointless. It's a very detached, ideological way of thinking. And funds I'm mentioning, like HG Capital, publish their holdings and have public stock listings – so they're far from opaque.

https://hgcapital.com
Show me what underlying drive of return HG Capital implements, that I can't implement with liquid stocks. I think liquid securitization of almost all assets with the accompanying reduction in cost and increased transparency and liquidity is one of the greatest innovations of the 21st century benefitting the retail investor.

I think I answered your other question in my last post:
I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.
So, to recap and re-phrase:
- The implied financing rate of options and futures is easily verified. The implied financing rates are near the risk-free rate (T-bills). This is a fact. The explanation lies in the maximum leverage ratio. The counterparties look at maximum assumed daily volatilities of the underlying treasuries, equities, etc. The implied risk for the counterparty is practically zero.
- The bid/ask spreads of the options spreads and futures are also near zero.
- I don't hedge the actual risk exposure do the underlying, as the exposure is exactly the calculated risk that I want to have based on my asset allocation (including glide path with age). Hedging a leveraged exposure would seem utterly counterproductive and probably inefficient. Of course I manage the total strategy drawdown risk by rebalancing the exposure.
Like I said, I think it's safe to say that no "professional" superstar investment firm in the world can do this part more efficiently. If they use leverage, it's probably more complicated and on various levels of the product setup; but they would almost certainly experience the same effective all-in risk in case of drawdowns of the underlying markets. We can observe this all the time as private funds lock up or disappear as a result of unexpected events or market behavior. Complexity won't eliminate the basic principle that leverage and hedging are contrarian, which common sense and logic also dictates - you cannot have your cake and eat it too. You just have to decide on your short-term risk exposure to optimize your long-term distribution of outcomes, which is your asset allocation.
Logan Roy
Posts: 1891
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Re: More Evidence Against Factor Investing

Post by Logan Roy »

comeinvest wrote: Wed Apr 03, 2024 9:58 pm
Logan Roy wrote: Wed Apr 03, 2024 8:07 pm
comeinvest wrote: Tue Apr 02, 2024 3:32 pm
Logan Roy wrote: Tue Apr 02, 2024 2:45 pm
comeinvest wrote: Tue Apr 02, 2024 1:04 pm

There is no free lunch with leverage, I never said that; but I'm getting the risk free rate and that can hardly be beat by "institutional-grade private equity". There is also no cash drag if done right. And luckily nobody advertises options and futures, which speaks for using them ;) And yes I take and manage the risk of leveraged exposure, or else I wouldn't leverage ;) Your "institutional" or "private" investment vehicle will do the same, if it's leveraged. I don't need PE or mysterious and opaque private "anything" stuff do get efficient leverage, which is what you implied before. It's 2024, not 19-something.
"not for serious people" - you keep making tons of unfounded assumptions. LETFs are actually inherently a tiny bit safer than options and futures outside the ETF, because of daily rebalancing and the corporate shell, and there was historically no measurable volatility drag if done right within a diversified portfolio. But I'm not using them because of the fees.
mHFEA didn't do anything unexpected, its drawdown tail risk is calculated and high by design (or else you are free to implement it with lower leverage), and it has at least a 70 year tested history, so 2 years don't matter. mHFEA is also a lifetime glide path strategy with by magnitudes higher leverage and higher expected returns than your private equity products, so this is completely off topic for the discussion at hand.
You keep using generic language and buzzwords from "glossy" brochures, like "institutional-grade". Those words don't impress me until I see evidence that it does anything good for me. You are not showing any evidence that any of that illiquid, mysterious, opaque, non-marginable, and cumbersome to manage and to monitor "private stuff" (lol) improves my risk-adjusted returns in any way. Sorry, not convinced ;)
I don't recommend private equity and infrastructure to others, and have a hard time explaining how you should think about private equity to other investors – even advisors at decent firms. There's a PE fund I wish I'd been in (3i group), which is up 2,500% since the GFC. Two that have closed that did exceptionally well, that I held since the GFC .. One I've still got is HG Capital, and while I've not held it this long, it's up 7,000% since the mid-90s, and has been consistent (it knows its niche) .. The Hedgefundie strategy has not done those kinds of returns in the real world – and I don't think it's likely to .. I've seen far more impressive backtests that don't concern me as much. And you've got to remember, my approach is an approach multi-$billion endowments, sovereign wealth and pension funds employ. While the financial media makes crude comparisons to the S&P, and steers retail investors the wrong way at every turn. There's a big difference. These giant funds can't afford to make idiotic decisions and keep course-correcting.

Futures concern me infinitely more, because unless you can cover potential losses, all you've got is a betting slip. I'm still at a loss for how you use them safely for leveraged market exposure .. Daily leveraged ETFs .. A few years ago, everyone knew what 'daily leverage' meant – and it meant day trading .. I think they still even say in their literature: not suitable for holding overnight.

And recently, with the influx of clueless investors getting drawn into the post-stimulus rally, I think there have been more articles on how these are actually quite safe, effective ways to get leveraged market exposure .. But the sequence of returns risk is far too great to have 60% of your net worth in this kind of product .. You can even work out the chance of a leveraged ETF going bankrupt – and the thing people don't appreciate about investing is that as soon as you do something reckless, the risk event happens .. And that's because you could probably find 20-30 bad, leveraged strategies and products that have fallen by the wayside since the 1980s. But we only consider the ones that haven't (yet). That is a much greater bias than people realise.
I'm sorry but you are not demonstrating anything. If it's hard to impossible to explain let alone to rationalize why I should stuff my money into private stuff, then I would say there is a possibility that there is no case.

I told you the facts about LETFs (which I'm not even using), which you can replicate if you read some previous threads in this forum.

I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.

If a moderately leveraged public equities + treasuries strategy goes bust or has a major drawdown, then your private "stuff" (lol) that is leveraged on various levels will likely almost certainly have similar issues, and there are numerous examples of private funds locking up and/or "quietly" disappearing.

For whatever private fund that had a 2,500% return since the GFC (not a major accomplishment for some leveraged strategy that started at the very bottom of the deepest drawdown in modern history, and after selection bias), there are numerous other private funds that "quietly" (lol) disappeared, and others that had dismal returns, and there are a number of equivalent, publicly traded operational, investment holding, or investment companies similarly diversified in some industry, that had similarly stellar returns.

There are numerous studies that show that upon rigorous examination, claims to returns, risk, or diversification in the glossy brochures of private investment vehicles, that use some of the buzzwords that you also used, are baloney. In fact I have not seen any substantiated evidence that those fee laden products do any good, although I spent a great deal of my life looking at and examining many of them.

I have seen no evidence from you that opaque and obscure private investments with the obvious operational, portfolio management, and liquidity headaches not to mention the fees, increase returns, increase diversification, or reduce risk vs. an equivalent implementation of the same underlying drivers of return with equivalent amount of leverage or risk using public, liquid, transparent, marginable securities in a brokerage account. Show me some substantiated evidence, and I'm in. Citing "authority" of "professionals", doing "what others do", hiding behind illiquidity and lack of marketable pricing, or using generic language and marketing buzzwords, don't impress or convince me. It's 2024, and we live in a world with free access to and with free flow of information.
I keep asking you how you're using Futures safely, and you don't tell me. I think I've explained the basic problem twice, which is that no one's actually lending you money at intra-bank rates to bet on stocks – whoever's assuming the risk is taking their cut somewhere, and it might be in spreads. And the you can't leverage safely if you can't cover losses – which means having dry powder .. And if you can't explain how you're doing this (and if you can, maybe I am missing something), I'd assume you're doing something much riskier or costlier than you realise. (being that that's not uncommon)

I also explained that the threads on here, like Hedgefundie's, are not an education for me. They're more like cautionary tales. But I'm cautious when someone believes a whole asset class is pointless. It's a very detached, ideological way of thinking. And funds I'm mentioning, like HG Capital, publish their holdings and have public stock listings – so they're far from opaque.

https://hgcapital.com
Show me what underlying drive of return HG Capital implements, that I can't implement with liquid stocks. I think liquid securitization of almost all assets with the accompanying reduction in cost and increased transparency and liquidity is one of the greatest innovations of the 21st century benefitting the retail investor.

I think I answered your other question in my last post:
I personally use options and futures at rates near the risk-free rate for moderate leverage. This efficiency cannot be beat by any "professional" superstar investment firm in the world, regardless how sophisticated. I also deliberately take and manage this moderate leverage risk and I use no hedge, or else I would not use leverage in the first place.
So, to recap and re-phrase:
- The implied financing rate of options and futures is easily verified. The implied financing rates are near the risk-free rate (T-bills). This is a fact. The explanation lies in the maximum leverage ratio. The counterparties look at maximum assumed daily volatilities of the underlying treasuries, equities, etc. The implied risk for the counterparty is practically zero.
- The bid/ask spreads of the options spreads and futures are also near zero.
- I don't hedge the actual risk exposure do the underlying, as the exposure is exactly the calculated risk that I want to have based on my asset allocation (including glide path with age). Hedging a leveraged exposure would seem utterly counterproductive and probably inefficient. Of course I manage the total strategy drawdown risk by rebalancing the exposure.
Like I said, I think it's safe to say that no "professional" superstar investment firm in the world can do this part more efficiently. If they use leverage, it's probably more complicated and on various levels of the product setup; but they would almost certainly experience the same effective all-in risk in case of drawdowns of the underlying markets. We can observe this all the time as private funds lock up or disappear as a result of unexpected events or market behavior. Complexity won't eliminate the basic principle that leverage and hedging are contrarian, which common sense and logic also dictates - you cannot have your cake and eat it too. You just have to decide on your short-term risk exposure to optimize your long-term distribution of outcomes, which is your asset allocation.
The driver of HG Capital's returns are that they're an organisation with decades of experience developing software businesses. So they have an in-depth knowledge of the sector, and know what organisations need, which enables them to identify innovative private companies, then supply them with the investment, resources and people they need .. Swensen talks about why this is a much better system than public markets – you're making businesses better, and there's no pressure to maximise quarterly earnings .. they can spend as long as they need developing a business. "A better form of capitalism."

Again, I know full well the rates on futures and how they work. But there is usually a funding rate, and a point at which you're going to get margin called. And to me that looks like a perpetual expense, and a betting slip. Which is what futures are. e.g. How does your leveraged exposure survive a 60% drawdown in stocks? That's why traders hedge futures.
comeinvest
Posts: 2728
Joined: Mon Mar 12, 2012 6:57 pm

Re: More Evidence Against Factor Investing

Post by comeinvest »

Logan Roy wrote: Thu Apr 04, 2024 1:18 pm The driver of HG Capital's returns are that they're an organisation with decades of experience developing software businesses. So they have an in-depth knowledge of the sector, and know what organisations need, which enables them to identify innovative private companies, then supply them with the investment, resources and people they need .. Swensen talks about why this is a much better system than public markets – you're making businesses better, and there's no pressure to maximise quarterly earnings .. they can spend as long as they need developing a business. "A better form of capitalism."
These are words with no evidence. I'm sure there are examples where a manager tries to impress with some short-term results or where short-term results are more incentivized; but I have not come across any study that supports this notion that public companies are under such pressure to increase short-term cash flow that long-term returns are sacrificed on average and in aggregate. Many companies are valued by the market by expected future success, and I know many examples (not all for sure) where management has a very long-term view and communicates that very well to shareholders. I can't speak to aggregate performance; show me a study that demonstrates that private companies have superior returns in the long run, and I'm in.
Logan Roy wrote: Thu Apr 04, 2024 1:18 pm Again, I know full well the rates on futures and how they work. But there is usually a funding rate, and a point at which you're going to get margin called. And to me that looks like a perpetual expense, and a betting slip. Which is what futures are. e.g. How does your leveraged exposure survive a 60% drawdown in stocks? That's why traders hedge futures.
If you know how they work, why do you ask? I really don't understand what you are trying to get at. Define "funding rate", "perpetual expense", "betting slip"??? "Traders hedge futures"???
Like I said before, if you want leveraged exposure, then leverage; if not, don't leverage. You have to define your asset allocation and your target exposure to markets. You can call your exposure to risk and return factors "betting slip" or whatever you want. It's also called asset allocation, and this is the nature of investing. I don't see what this has to do with the private/public discussion. Yes I get margin called in a 60% market drop if I don't deleverage (and if initial leverage was > ca. 1.5x). And yes because of increased volatility decay as the leverage ratio rises, it would be silly not to deleverage. Like I said, any private investment vehicle with leveraged exposure will incur the same risk and it can be seen all the time how that risk materializes. Your private, leveraged infrastructure fund, along with practically all other internally leveraged public or private entities, will need to deleverage in a 60% market drop if they had equivalent initial leverage, or they will go bust. If they use longer-term or non-callable financing, they have to pay higher rates for that, and as a result they can achieve accordingly less total leverage, and/or return spreads will be smaller, and during longer downturns they still have to deleverage. Nothing magic there; I can achieve the same effect with options and futures, with no middlemen, with an efficiency that no superstar investment firm in the world can beat.
It is easy to hedge deep drawdown tail risk events with options; but arguably it is nonsensical to hedge a leveraged exposure (almost an antonym). Equity markets have high returns, because they can experience deep drawdowns, and because they have some hard to quantify terminal tail risk. If you hedge all your equity market exposure, you are back at the risk-free rate.
I think we are going in circles, if you don't show any evidence that private investments improve my lifetime risk or return profile. I spent my whole life searching for evidence, and have not seen any. All the buzzwords and promises usually disappear in a puff of smoke upon closer inspection and rigorous analysis.
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Re: More Evidence Against Factor Investing

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