One of the most embarrassing moments of my life occurred during a dim sum lunch with a PR representative in Hong Kong.
My wife and I were in the city for a work project and we had received an invitation to go out for lunch.
We were given an address and we knew what neighbourhood we were meeting in, but that was the extent of our research. After all, it was just dim sum!
Up until then, my experience with dim sum was limited to Malaysia where it was all about outdoor plastic chairs, pushcart trolleys, boisterous conversations and shirtless men smoking cigarettes whilst reading the local newspaper.
I thought we were going out for the most casual of lunches and I couldn’t have been more wrong!
Because it was a rainy day, we hopped in taxi and we were a little surprised when our driver dropped us off at the International Commerce Center, a super glitzy skyscraper overlooking Victoria Harbour.
It turns out the restaurant we were going to was located on the 102 floor of the Ritz-Carlton Hotel.
As I entered the elevator it became painstakingly obvious I was severely underdressed for the occasion.
Here I was decked out in a t-shirt, shorts and sandals, while men around me were sporting business suits.
As the elevator door opened my heart was beating like a drum.
The maître d’ quickly looked me over, asked if I was in the right place, and the proceeded to lead me to a backroom where I was presented with a bag containing shoes, a dinner jacket and trousers.
Apparently, I wasn’t the first idiot to arrive at this restaurant not dressed for the occasion.
However, I felt relieved as this seemed like a reasonable enough solution.
The only problem was that the trousers were for a man that was about 5’7 and 135 lbs.
And here I am 6’1 and 190 lbs.
I tried to put on the pants, but they were more like capri pants on me leaving my ankles and calves exposed.
Zip up the pants?
Forget about it.
The dinner jacket wasn’t any better.
Imagine a sausage casing.
The only thing that fit reasonably well were the shoes.
So out I came from the backroom dressed like some kind of farang freakshow waltzing my way to the table.
It actually looked about 10X worse than had I just remained woefully underdressed.
At that moment, if I could have crawled into a cave and died, I might have chosen that option.
Somehow, our host kept a straight face while my wife tried her best to contain her laughter.
We got through lunch, which featured dim sum with gold leaf and the best views of Hong Kong.
Style premia?
Zero that day.
But we’re not here to poke anymore fun at my fashion faux pas. Instead, let’s learn more about a fascinating alternative investing strategy.
What Is Style Premia?
Style Premia is not related to how appropriately you dress for dinner; it’s a multi-strategy plus multi-asset class way of expressing long-short styles across research supported factors such as carry, defensive, value and momentum.
I like to think of it as a 4 x 4 tearing around in the mud.
You’ve got four asset classes:
- Equities
- Bonds
- Commodities
- Currencies
And you’re expressing four distinct investing styles:
- Value
- Momentum
- Carry
- Defensive
source: ReSolve Riffs on YouTube
Style premia, in the world of finance, refers to investment strategies that aim to capture specific returns associated with distinct investment styles. These styles are based on systematic patterns or anomalies found in markets over time. The concept is grounded in the belief that certain characteristics of assets can predict higher returns. Here’s a breakdown of what constitutes style premia:
- Value: This style is based on the principle that stocks or assets priced below their intrinsic value will, over time, provide superior returns as the market corrects the mispricing. It’s akin to finding a high-quality item on sale; eventually, its price is expected to reflect its true worth.
- Momentum: Momentum investing involves capitalizing on the continuation of existing market trends. It operates on the premise that assets which have performed well in the recent past will continue to do so in the short-term future, and vice versa for poorly performing assets.
- Carry: In the carry trade, investors profit from the difference between the yields of two assets. For example, in currency markets, it might involve borrowing in a currency with a low interest rate and investing in a currency with a higher interest rate, profiting from the spread.
- Defensive (Low Volatility): Defensive or low volatility investing focuses on assets with lower risk and volatility compared to the market. The idea is that these assets will yield better risk-adjusted returns over time, as they are less susceptible to large market swings.
Style premia strategies involve going long (buying) assets that exhibit these desirable characteristics whilst going short (selling) assets that do not. The strategies can be applied across various asset classes, including equities, bonds, commodities, and currencies to systematically capture the desired exposures.
The appeal of style premia investing lies in its systematic approach that diversifies across different styles; investors can potentially reduce risk and enhance returns, as these styles tend to perform differently across various market environments.
Style Premia Potluck Dinner
Picture this as an episode of “The Investment Chef,” where strategies are not just strategies, but characters at a high-stakes potluck dinner.
- Value Investing: Meet Value Vick, the thrift shop connoisseur. He’s the guy who buys neon leg warmers and vinyl records for pennies and swears they’ll be worth a fortune. At the potluck, he brings a casserole he made from discounted, day-old bread and mystery meat he swears is prime rib. Everyone’s skeptical until Gordon Ramsay stops by, tastes it, and declares it a culinary masterpiece. Value Vick smirks, his dish is now the hit of the party.
- Momentum Investing: Then there’s Momentum Mandy. She’s on TikTok 24/7, catching trends before they’re cool. For the potluck, she brings the latest viral sensation: cloud eggs. Half the room thinks she’s a genius; the other half hasn’t even heard of cloud eggs yet. Mandy’s dish is popular until someone mentions they’re so last week, and suddenly, she’s in the kitchen whipping up dalgona coffee.
- Carry Trading: Carry Trader Carl walks in, a Monopoly millionaire, always collecting rent. He’s brought a fondue set, charging people a dollar to dip their snacks. It’s all fun and games until someone realizes they’re actually paying to eat their own food. Carl’s making a killing, though, and offers to share his profits if you’ll just let him set up a mini-bar next to the fondue station.
- Defensive Investing: Lastly, we have Defensive Dana. She’s wrapped in bubble wrap, carrying a salad made entirely of superfoods. It’s designed to survive a nuclear fallout and still provide 100% of your daily vitamins. Dana’s corner of the table is for those who want to play it safe, avoiding the rollercoaster of food poisoning from Uncle Value’s mystery meat casserole.
Combine all these personalities at the potluck, and you’ve got the Style Premia strategy: a smorgasbord of investing tactics that might seem quirky on their own but together aim to conquer the buffet of alternative strategies. It’s a blend of finding hidden gems, riding the wave of popularity, making money off literally anything, and always having a safety net (made of kale, probably). Because in the end, why put all your eggs in one basket when you can spread them across a buffet while you’re at it?
Uncorrelated Strategy + Absolute Return Potential
The concept of style premia strategies revolves around the aim to deliver absolute returns, which means trying to generate positive returns irrespective of the broader market’s direction. This ambition sets style premia apart from traditional equity or bond investments, which often depend on market trends for performance.
Its returns in 2022 provide a perfect example of this:
Style premia strategies often exhibit low correlation with traditional asset classes like stocks and bonds. This characteristic is pivotal for absolute return strategies, as it allows these investments to potentially generate positive returns even when traditional markets are flat or declining. What’s fascinating is that style premia is also uncorrelated with many other alternative strategies!
Hence, there is a tremendous diversification benefit to integrating it into a portfolio that has traditional assets (equities and bonds) and an alternative sleeve (managed futures, gold, market neutral, etc).
The question you need to ask yourself as an investor is whether or not you want to shave down (existing exposures) or expand the canvas (create space with capital efficient funds) to make room for it all.
Review of AQR Style Premia Alternative Mutual Fund : Reviewing QSPIX Fund
Hey guys! Here is the part where I mention I’m a travel blogger, vlogger and content creator! This investing opinion blog post ETF Review is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
AQR Capital Management: OG Alternative Investment Provider
AQR Capital Management is without a doubt the OG Alternative fund provider.
Here is their complete roster of alternative funds:
AQR Complete Alternative Funds List
Single Strategy
AQR Diversified Arbitrage Fund – I: ADAIX / N: ADANX / R6: QDARX
AQR Equity Market Neutral Fund – I: QMNIX / N: QMNNX / R6: QMNRX
AQR Long-Short Equity Fund – I: QLEIX / N: QLENX / R6: QLERX
AQR Macro Opportunities Fund – I: QGMIX / N: QGMNX / R6: QGMRX
AQR Managed Futures Strategy Fund – I: AQMIX / N: AQMNX / R6: AQMRX
AQR Managed Futures Strategy HV Fund – I: QMHIX / N: QMHNX / R6: QMHRX
AQR Risk-Balanced Commodities Strategy Fund – I: ARCIX / N: ARCNX / R6: QRCRX
AQR Sustainable Long-Short Equity Carbon Aware Fund – I: QNZIX / N: QNZNX / R6: QNZRX
Multi-Strategy
AQR Alternative Risk Premia Fund – I: QRPIX / N: QRPNX / R6: QRPRX
AQR Diversifying Strategies Fund – I: QDSIX / N: QDSNX / R6: QDSRX
AQR Style Premia Alternative Fund – I: QSPIX / N: QSPNX / R6: QSPRX
AQR Multi-Asset Fund – I: AQRIX / N: AQRNX / R6: AQRRX
AQR Style Premia Alternative Fund Overview, Holdings and Info
The investment case for “AQR Style Premia Alternative Fund” has been laid out succinctly by the folks over at AQR Capital Management: (source: fund landing page)
Seeks Attractive Risk-Adjusted Returns
Opportunity To Perform In Rising And Falling Markets
Core Allocation To Alternatives
AQR Style Premia Alternative Fund: QSPIX Fund Selection Process
To better understand the process of how the fund operates, let’s turn our attention towards the summary prospectus where I’ve summarized the key points at the very bottom. (source: summary prospectus)
Principal Investment Strategies:
Principal Investment Strategies
“The Fund pursues its investment objective by aiming to provide exposure to four separate investment styles (“Styles”): value, momentum, carry and defensive, using both long and short positions within the following asset groups (“Asset Groups”): equities, bonds, interest rates, commodities and currencies. The Fund will achieve its exposure to any of the Asset Groups by using derivatives or holding those assets directly. The Fund will also use derivatives for hedging purposes. The Fund implements the Styles by investing globally (including emerging markets) in a broad range of instruments, including, but not limited to, equities, futures (including commodity futures, index futures, equity futures, bond futures, currency futures and interest rate futures), currency and commodity forwards and swaps (including commodity swaps, swaps on commodity futures, equity swaps, swaps on index futures, total return swaps and interest rate swaps) (collectively, the “Instruments”). The Fund will either invest directly in the Instruments or indirectly by investing in the Subsidiary (as described below) that invests in the Instruments. The Fund may invest in or have exposure to companies of any size. The Fund may also invest in other registered investment companies including exchange-traded funds.
The Fund’s exposure to equities includes securities of U.S. and non-U.S. issuers and equity indices representing the
United States and non-U.S. countries, including, with respect to non-U.S. countries, those from emerging markets. For the bonds Asset Group, the Fund will have exposure to U.S. Government securities and sovereign debt issued by other developed and emerging market countries. The Fund may invest in debt securities of any credit rating, maturity or duration, which may include high-yield or “junk” bonds. From time to time, the Fund can have significant exposure to non-U.S. dollar denominated currencies, including emerging markets currencies. The Fund is generally intended to have a low correlation to the equity, bond and credit markets. The Fund also is not designed to match the performance of any hedge fund index. In order to minimize market impact and reduce trading costs, where applicable, the Fund will utilize a proprietary approach to algorithmic trading. The Adviser will attempt to mitigate risk through diversification of holdings and through active monitoring of volatility, counterparties and other risk measures. There is no assurance, however, that the Fund will achieve its investment objective.
The Styles employed by the Fund are:
Value: Value strategies favor investments that appear cheap over those that appear expensive based on fundamental measures related to price, seeking to capture the tendency for relatively cheap assets to outperform relatively expensive assets. The Fund will seek to buy assets that are “cheap” and sell those that are “expensive.” Examples of value measures include using price-to-earnings and price-to-book ratios for selecting equities.
Momentum: Momentum strategies favor investments that have performed relatively well over those that have underperformed over the medium-term (i.e., one year or less), seeking to capture the tendency that an asset’s recent relative performance will continue in the near future. The Fund will seek to buy assets that recently outperformed their peers and sell those that recently underperformed. Examples of momentum measures include simple price momentum for selecting equities and price- and yield-based momentum for selecting bonds.
Carry: Carry strategies favor investments with higher yields over those with lower yields, seeking to capture the tendency for higher-yielding assets to provide higher returns than lower-yielding assets. The Fund will seek to buy high-yielding assets and sell low-yielding assets. An example of carry measures includes using interest rates to select currencies and bonds.
Defensive: Defensive strategies favor investments with low-risk characteristics over those with high-risk characteristics, seeking to capture the tendency for lower risk and higher-quality assets to generate higher risk-adjusted returns than higher risk and lower-quality assets. The Fund will seek to buy low-risk, high-quality assets and sell high-risk, low-quality assets. Examples of defensive measures include using beta (i.e., an investment’s sensitivity to the securities markets) to select equities.
The Fund is actively managed and the Fund’s exposures to Styles and Asset Groups will vary based on the Adviser’s ongoing evaluation of investment opportunities. The Fund expects to maintain exposure to all four Styles; however, not all Styles are represented within each Asset Group. The portfolio construction process is a bottom up systematic process which begins with the ranking of a universe of investments within each Asset Group based upon each applicable Style using multiple measures, some of which are listed above. Investments ranking near the top of the universe contribute the largest long weights among the universe and investments ranking near the bottom of the universe contribute the largest short weights among the universe to produce the target Asset Group portfolio. For each Asset Group, the Styles included in that Asset Group each contribute position weights to the Asset Group portfolio, in such a way that each Style achieves roughly equal risk within the Asset Group. Asset Group portfolios are sized to also maintain a risk balanced allocation across Asset Groups within the Fund. Individual investments in the actual Asset Group portfolios are bought or sold during the rebalancing process, the frequency of which is expected to vary depending on the Asset Group and the Adviser’s ongoing evaluation of certain factors including changes in market conditions and how much the actual portfolio deviates from the target portfolio.
The Adviser, on average, will target an annualized volatility level for the Fund of 10%. Volatility is a statistical measurement of the dispersion of returns of a security or fund or index, as measured by the annualized standard deviation of its returns. The Adviser expects that the Fund’s targeted annualized forecasted volatility will typically range between 8% and 15%; however, the actual or realized volatility level for longer or shorter periods may be materially higher or lower depending on market conditions. Higher volatility generally indicates higher risk. Actual or realized volatility can and will differ from the forecasted or target volatility described above.
The Fund’s strategy engages in frequent portfolio trading which may result in a higher portfolio turnover rate than a fund with less frequent trading, and correspondingly greater brokerage commissions and other transactional expenses, which are borne by the Fund, and may have adverse tax consequences.
The Fund intends to make investments through the Subsidiary and may invest up to 25% of its total assets in the Subsidiary. The Subsidiary is a wholly-owned and controlled subsidiary of the Fund, organized under the laws of the Cayman Islands as an exempted company. Generally, the Subsidiary will invest primarily in commodity-linked derivative instruments such as commodity futures, commodity forwards and commodity swaps (which include swaps on commodity futures), but it may also invest in financial futures, option and swap contracts, fixed income securities, pooled investment vehicles, including those that are not registered pursuant to the 1940 Act, and other investments intended to serve as margin or collateral for the Subsidiary’s derivative positions. The Fund will invest in the Subsidiary in order to gain exposure to the commodities markets within the limitations of the federal tax laws, rules and regulations that apply to registered investment companies. Unlike the Fund, the Subsidiary may invest without limitation in commodity-linked derivative instruments, however, the Fund and the Subsidiary will comply with Rule 18f-4 on a consolidated basis with respect to investments in derivatives. In addition, the Fund and the Subsidiary will be subject to the same fundamental investment restrictions on a consolidated basis and, to the extent applicable to the investment activities of the Subsidiary, the Subsidiary will follow the same compliance policies and procedures as the Fund. Unlike the Fund, the Subsidiary will not seek to qualify as a regulated investment company under Subchapter M of the Code. The Fund is the sole shareholder of the Subsidiary and does not expect shares of the Subsidiary to be offered or sold to other investors.
A portion of the Fund’s assets will be held in cash or cash equivalent investments, including, but not limited to, interests in short-term investment funds, short-term bond fund shares, money market fund shares and/or U.S. Government securities.”
AQR Style Premia Alternative Fund Key Points
- Investment Objective and Styles: The Fund aims to provide exposure to four investment styles – value, momentum, carry, and defensive – across various asset groups including equities, bonds, interest rates, commodities, and currencies, employing both long and short positions.
- Asset Groups and Global Reach: Investments span globally, including emerging markets, across a diverse set of instruments such as equities, futures, currency and commodity forwards, and swaps. The Fund can invest directly in these instruments or indirectly through a subsidiary.
- Equity and Bond Exposure: The Fund’s equity exposure includes U.S. and non-U.S. issuers and indices, while bond exposure includes U.S. Government securities and sovereign debt from both developed and emerging markets. It may invest in debt securities of any credit rating, including high-yield bonds.
- Currency Exposure: The Fund may have significant exposure to non-U.S. dollar denominated currencies, including those from emerging markets, aiming for low correlation to traditional equity and bond markets.
- Investment Strategies Detailed:
- Value: Favors cheap assets based on fundamental measures like price-to-earnings and price-to-book ratios.
- Momentum: Prefers assets with superior medium-term performance, utilizing measures like price momentum.
- Carry: Seeks higher-yielding assets, using interest rates for selection.
- Defensive: Chooses low-risk, high-quality assets, with the goal of higher risk adjusted rates of returns.
- Portfolio Construction: Utilizes a systematic, bottom-up process that ranks investments within each asset group by each style. The process aims for equal risk distribution across styles within asset groups and a balanced risk allocation across asset groups.
- Volatility Management: The Adviser targets an average annualized volatility level for the Fund of 10%, with an expected range of 8% to 15%. Actual volatility may vary based on market conditions.
- Trading and Tax Considerations: The Fund engages in frequent trading, potentially leading to higher transaction costs and adverse tax consequences.
- Subsidiary Investments: Up to 25% of the Fund’s assets may be invested in a wholly-owned subsidiary to gain exposure to commodities markets within tax law limitations. The Subsidiary can invest in a wider range of commodities-related instruments than the Fund.
- Cash Holdings: A portion of the Fund’s assets will be held in cash or cash equivalents to possibly include short-term investment funds, money market funds, and U.S. Government securities, ensuring liquidity and margin/collateral for derivative positions.
AQR Style Premia Alternative Fund Info
Ticker: I: QSPIX / N: QSPNX / R6: QSPRX
Adjusted Expense Ratio: 1.52
AUM: 1.01 Billion
Inception: 10/30/2013
AQR Style Premia Alternative Fund Strategy Pros and Cons
Let’s move on to examine the potential pros and cons behind the strategy of AQR Style Premia Alternative Fund.
QSPIX Pros: Distinct Advantages
- Diversification Across Styles and Asset Classes: By investing across multiple styles and asset classes (equities, bonds, commodities, currencies), the strategy offers a higher level of diversification, reducing the overall portfolio risk compared to traditional single-style or single-asset investments.
- Low Correlation to Traditional Markets: Style premia strategies often exhibit low correlation to traditional equity and bond markets, providing a valuable source of portfolio diversification and potentially reducing overall volatility.
- Low Correlation with Other Alternative Strategies: It was fascinating to discover that Style premia is uncorrelated with managed futures and gold.
- Systematic Risk Management: Utilizes quantitative models to systematically manage risk, ensuring that investments are spread across various styles and asset classes to maintain a balanced risk profile, targeting specific volatility levels.
- Enhanced Return Potential: By capturing premiums across different investment styles, the strategy aims to enhance returns over the long term, capitalizing on the tendency of certain styles to outperform under different market conditions.
- Opportunistic Long/Short Positions: The ability to take both long and short positions in various markets allows the strategy to profit from rising and falling markets, providing a potential source of positive returns irrespective of market direction.
- Exposure to Global Markets: Investing globally, including in emerging markets, offers exposure to a wider range of economic conditions and opportunities, potentially enhancing returns and reducing risk through geographic diversification.
- Flexibility and Adaptability: The strategy’s systematic approach allows for flexibility and adaptability to changing market conditions, enabling quick adjustments to the portfolio’s exposure across different styles and asset classes.
- Advanced Risk Management Techniques: Utilizes advanced risk management techniques, including proprietary algorithms for trading and active monitoring of volatility and other risk measures, to mitigate potential losses.
- Potential for Improved Risk-Adjusted Returns: The combination of diversified exposures and systematic risk management aims to improve risk-adjusted returns, making the strategy an attractive option for investors seeking to optimize their risk/reward profile.
- Access to Alternative Risk Premia: By focusing on style premia, the strategy provides access to alternative risk premia that are not easily accessible through traditional investment strategies, offering a unique source of potential alpha generation.
- Absolute Return Potential: The strategy/fund delivered a +30.64% CAGR in 2022 when a 60/40 VBIAX (-16.90%) and S&P 500 SPY (-18.17%) got slaughtered
- Core Alternative Strategy Or Satellite Diversifier: Can easily be a core alternative strategy with its multi-asset class plus multi-strategy approach or a satellite diversifier
- Expanded Canvas Portfolios Potential: Can be combined with other uncorrelated traditional investing strategies (long-only stocks and bonds) and uncorrelated alternatives (managed futures, gold, arbitrage) to build a robust portfolio
QSPIX Cons: Potential Limitations
- Complexity: The strategy’s reliance on multiple investment styles and asset classes, along with the use of sophisticated algorithms (and long-short nature), can make it complex and difficult for some investors to understand fully.
- Cost: Implementing a Style Premia Alternative Strategy can be costlier than traditional investment strategies due to the need for advanced risk management systems and more frequent trading to express its long-short views.
AQR Style Premia Alternative Fund Model Portfolio Ideas
These asset allocation ideas and model portfolios presented herein are purely for entertainment purposes only. This is NOT investment advice. These models are hypothetical and are intended to provide general information about potential ways to organize a portfolio based on theoretical scenarios and assumptions. They do not take into account the investment objectives, financial situation/goals, risk tolerance and/or specific needs of any particular individual.
QSPIX offers investors a myriad of interesting options for potential portfolio construction.
Anywhere between a 10% (as a satellite diversifier) allocation up to a 30% (as an alternative core strategy) allocation makes sense.
Let’s explore some of those combinations.
Style Premia Expanded Canvas Portfolio
For those seeking to expand the canvas of their portfolio to add style premia (plus other alternative strategies) it’s never been easier to do just that.
Model Portfolio:
40% RSSB – Return Stacked Global Stocks & Bonds ETF
20% RSST – Return Stacked US Stocks & Managed Futures ETF
20% QPSIX – AQR Style Premia Alternative Fund
10% LCSIX – LoCorr Long/Short Commodity Strategies Fund
10% BTAL – AGF US Market Neutral Anti Beta Fund
Exposures:
60% Equities (Global + US)
40% Bonds
20% Managed Futures
20% Style Premia
10% Long-Short Commodities
10% Market Neutral Anti-Beta
Canvas: 160%
Here we’ve maintained the backbone of a 60/40 with a hefty 60% pile of uncorrelated alternatives added to the mix.
Let’s utilize VBIAX (60/40) and PQTIX (Managed Futures) to backtest this robust beast bad boy .
CAGR: 10.47% vs 7.73%
RISK: 8.90% vs 10.15%
MAX DD: -6.87% vs -16.90%
WORST YEAR: -11.21% vs -20.78
SHARPE: 1.02 vs 0.66
SORTINO: 1.69 vs 1.00
CORRELATION: 0.89 vs 0.98
Here we’ve got ourselves a nifty returns above risk portfolio boasting a Sharpe 1.00+ Ratio.
Hey, let’s not be modest over here.
It absolutely cleans the clock of a static 60/40 with its diverse range of uncorrelated long-short alternative absolute return strategies in terms of having significantly better CAGR, risk management and risk adjusted rates of returns.
Finally, let’s move on to drawdowns.
I like what I see.
Style Premia Countdown Portfolio (4, 3, 2, 1)
Let’s explore an out of the box countdown portfolio where our style premia allocation is high conviction at 30%.
Model Portfolio:
40% AUEIX – AQR Large Cap Defensive Style
30% QSPIX – AQR Style Premia Alternative
20% ABYIX – Abbey Capital Futures Strategy
10% BTAL – AGF U.S. Market Neutral Anti-Beta
Exposures:
40% US Defensive Equities
30% Style Premia
20% Managed Futures
10% Market-Neutral Anti-Beta
Canvas: 100%
Here we’re rolling with four uncorrelated strategies as a potential alternative portfolio versus the milquetoast 60/40.
CAGR: 7.71% vs 7.51%
RISK: 6.92% vs 10.36%
MAX DD: -7.53% vs -20.78%
WORST YEAR: -3.52% vs -and 16.90
SHARPE: 0.91 vs 0.62
SORTINO: 1.58 vs 0.94
CORRELATION: 0.50 vs 0.98
You’ll notice with the Style Premia Countdown Portfolio that we’re compounding in a very different manner compared to the 60/40 portfolio.
We’ll celebrate slight outperformance but in particular one should feast their eyes upon the differences in drawdown management (-7.53% vs -20.78%) and lower correlations with markets (0.50 vs 0.98).
You’ll notice the Countdown Portfolio is an impenetrable fortress, from a drawdown management perspective, when compared to the 60/40 portfolio.
Skin A Cat 60/40 Style Premia Portfolio
For investors that insist upon a 60/40 as the bedrock of their portfolio (and aren’t open to capital efficiency) we’ll shave things down to create some space for style premia as a satellite diversifier.
We’re just dipping our toes in the water over here.
Model Portfolio:
90% VBIAX
10% QPSIX
Exposures:
90% 60/40
10% Style Premia
Canvas: 100%
Here we’ve made space for style premia as a satellite diversifier bringing an additional strategy into the portfolio.
CAGR: 7.73% vs 7.73%
RISK: 9.10% vs 10.15%
MAX DD: -16.89% vs -20.78%
WORST YEAR: -12.14% vs -16.90
SHARPE: 0.72 vs 0.66
SORTINO: 1.11 vs 1.00
CORRELATION: 0.98 vs 0.98
So we’ve got the same returns here but we’ve improved the risk adjusted rate of returns across the board (SHARPE/SORTINO + MAX DD/WORST YEAR).
Even with just a slice we’ve improved the stability of the portfolio.
Nomadic Samuel Final Thoughts
One of the benefits of expanding your awareness and remaining curious as an investor is that you eventually stumble upon an alternative strategy like style premia.
When I first started my site in 2022, I didn’t even know what style premia was.
Now I’m excited to integrate it into my portfolio (along with other multi-strategy alternative approaches).
It’s vying for elbow space in my core alternative sleeve alongside managed futures, gold and other alternative strategies.
And that’s what excites me the most.
I want every single strategy in my portfolio to be competing for space the same way somebody pursuing an anti-aging protocol has various nutritious food items compete for space on their plate.
But at this point in the review I’m more interested in what you’ve got to say.
What do you think of style premia as a strategy and QSPIX in particular?
Please let me know in the comments below.
That’s all I’ve got for today.
Ciao for now!
Important Information
Investment Disclaimer: The content provided here is for informational purposes only and does not constitute financial, investment, tax or professional advice. Investments carry risks and are not guaranteed; errors in data may occur. Past performance, including backtest results, does not guarantee future outcomes. Please note that indexes are benchmarks and not directly investable. All examples are purely hypothetical. Do your own due diligence. You should conduct your own research and consult a professional advisor before making investment decisions.
“Picture Perfect Portfolios” does not endorse or guarantee the accuracy of the information in this post and is not responsible for any financial losses or damages incurred from relying on this information. Investing involves the risk of loss and is not suitable for all investors. When it comes to capital efficiency, using leverage (or leveraged products) in investing amplifies both potential gains and losses, making it possible to lose more than your initial investment. It involves higher risk and costs, including possible margin calls and interest expenses, which can adversely affect your financial condition. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official policy or position of anyone else. You can read my complete disclaimer here.
