TL;DR version: Learn how to do performance evaluation 101 or at least read up on those you're going to attack to see how to do it: aqr.com/-/media/AQR/Im…
Now the much longer and angrier version.
Gee some bad and nastily personal “analysis” (multiple tweets implying hypocrisy) from someone selling a twelve-minute old statistical futures-based replication product. Shocking.
This is bad analysis in multiple ways. Gross returns on both? Not even sure where you get those. I get somewhat different numbers using the net returns that are out there, and that I would think anyone would use? But that’s not a huge difference (though guess which direction it goes?). The bigger thing is the superficiality of the analysis. It’s almost like it was intentionally superficial to fit a predetermined sales pitch.
Among a whole bunch of things wrong, in particular we have noted many times that the SG index has a fair amount more long-term equity beta than we have (we believe this is because many have added carry-like strategies over time trying to improve returns over the desultory 2010-2021 period). Instead, we believe we have improved in ways that preserved convexity (carry is concave). In other words, we didn’t just add beta to try to make returns better like we believe many did. Long carry/beta “works” for that purpose it’s just not the point of managed futures. Our key improvements involve chasing not just past price trends but also past relevant fundamental trends for each asset (“economic trend“) and extending the universe to harder-to-access markets and strategies (“alternative trend“). We have written on this idea of improving trend following without taking on passive beta, the taking on of which again ruins much of the point of trend (aqr.com/-/media/AQR/Im…). But, alas, researching us carefully and actually reading our stuff before launching a hit tweet wasn’t on the menu!
Hint, look at alphas vs. the stock market — a big part of the point of trend following or any alternative asset. Look at it for us and for the SG index over the whole period. Look at Sharpe ratios (which is unfair to us as an index of managers gets impossible diversification — no, sorry, replication won’t do it — but look at Sharpes anyway even if we’re at a disadvantage both due to this diversification effect and, as I just said, many in the SG index adding carry / stock market exposure — which is positive Sharpe and will improve Trend stand alone but, again, that is not the point of trend). Better yet, look at the IR (residual Sharpe) relative to the stock market. Do it for AQR and for SG. Take the difference between the two and regress it on the stock market over the full period. This is like “performance evaluation 101.” Or, in fact, don’t do it yourself just read our piece which one would think you’d have done before coming at me by name. Or forget the whole thing and don’t look at any real performance analysis / risk adjustment and just hurl superficial stats that fit your marketing story while braying about how others do that.
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Oh, and we did the research on various aspects of our improvements 5-15 years ago. They have been phased in, traded at standalone vehicles in the late 2010s, and both enhancements were combined with the classic liquid-assets price-trend following only in early 2022. Admittedly getting across a nuanced timetable on TV is hard. But you try to nail me by going “gee he said 10 years” without really knowing squat. Gee, got me. Looks different more recently when all the changes are in doesn’t it? Even without beta adjusting but with beta adjusting — well you should really take a look. I wonder what happened? Before 2022, our choice not to add positive beta strategies like carry meant that our only-liquid-asset-price-trends (“only-liquid” means non-alternative) strategy tended to lag beta-biased peers during equity bull markets (lag in total return NOT necessarily in alpha vs. the market). Since the two attempted (compliance likes the word “attempted”) enhancements the story gets more interesting in both markets.
And if you want to say that post-2022 is too short (again, your results will likely change even over the much longer full-period when you adjust for market beta and use actual net returns) I’d mention that you opened your replication product, which you are clearly trying to sell here by coming after me (not a great idea btw) 12 minutes ago. We can only look at attempted enhancements since they were made. I believe the future will substantiate the 2022-2025 results, but of course that’s still unproven.
Oh, and whelp, we invented demystifying hedge fund alpha and charging less than hedge funds for it (aqr.com/Insights/Resea… or aqr.com/-/media/AQR/Do… among many others). That you might charge even less is just an efficient market at work. Actually, I just looked, you really don’t charge much less for statistical futures-based “replication” then we do for price trend, economic trend, and some alternative trends trading way more than just some simple futures (e.g., long and short 1000s of stocks for “factor momentum” a la aqr.com/Insights/Resea…). Hilarious.
Actually, you say “2 and 20” all over your website when that went away, not to a small part due to my and AQR’s efforts, for these type products a long time ago. Charging almost 100 bps for futures-based replication is ridiculous. Championing your fees while doing so is sublime.
Of course you don’t just do futures based statistical replication, no, you use “machine learning.” I can’t know this for sure but I’d bet a fair amount that’s way overstating how different it is from, you know, OLS, because you think it has more marketing rizz. But it is also deeply hypocritical for one who decries the pursuit of alpha. You charge alpha prices and imply you have “machine learning” alpha in your statistical futures-based replication all while attacking others for similar efforts (though way way better imho).
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Apr 6 • 5 tweets • 2 min read
Many seem to defend tariffs with the line of reasoning “the world is not coming to an end you’re being hysterical.”
Let’s be clear. That’s true (not the hysteria part). The US economy, companies, and citizens are resilient and will adapt.
It’ll just be worse. The job is to make it better. And instead it will be worse.
Another standard defense is “this is just 4D chess, what the president really wants is true free trade (zero tariffs) but he has to play hardball to get it.”
I’m not sure I’d be down with the brinksmanship, but if I truly believed this I’d feel much better.
I do not. A plumb line through the president’s often changing views over time is an antipathy to international trade. If someone has told you for 25 years what they believe, as insane as that belief may be, I think step one is believe them.
I truly hope I’m wrong about this and if we end in a world of MORE free trade I’ll doff my cap (not always fun for a bald man).
Feb 3, 2023 • 4 tweets • 1 min read
Good analysis, though I wouldn’t call this one a quant quake but a momentum crash which is a known risk (sciencedirect.com/science/articl…). As of close yesterday our full model was flat YTD. The momentum factor was down a ton. This is much less about quants than a big non quant reversal.
I don’t think there are enough quants (certainly ones willing to lever) left anymore to cause this!
Also factor vol and correlation has been quite high for a while so the average levered quant would likely have smaller dollar positions than usual, not bigger like in 2007.
Jan 18, 2023 • 16 tweets • 5 min read
Sigh, I kind of knew this was coming but hoped I’d be wrong.
Arnott wrote a paper called “How Can Smart Beta Go Horribly Wrong?” in 2016. In it he argued value was a cheap attractive factor but the rest data mined and expensive.
Because his paper was titled what it was it’s now painted as prescient. It was backwards.
Multi factor suffered 2018-2020 all because of value, the one factor he liked in his attack on smart beta in general
Aug 18, 2022 • 9 tweets • 4 min read
OK, “crumbles” is true if you look at the last two months, but it is kind of an odd thing to say about something still up solidly on the year. But headline writers gotta headline.
Of course I have lots of comments on the article though (surprising!).
bloomberg.com/news/articles/…
I know journalists can’t cover all the many (and there are many) subtleties in one article, so this isn’t a criticism. It’s just what I wish were discussed.
First and foremost I’d love to have seen some mention of the still ridiculous spread between cheap and expensive:
Aug 16, 2022 • 4 tweets • 1 min read
Jonah’s right. But, the responses are depressing. Not because they’re threatening (I didn’t see that) but because of many of their stubborn refusal to argue honestly. Jonah made no mention of the left and has called out crazy there forever w/o abatement during the Trump years.
Whataboutism is ok if that’s the only point ur trying to make. But it’s not fine when it doesn’t even address the actual point. A murderer on trial saying “but Charlie Manson did worse things” may be correct and, in another context, that might be relevant. Not for the trial.
