4 ms·

That's not necessarily true, it depends. For example risk parity is common knowledge but it still beats the market. You don't really need any secret sauce to us

That's not necessarily true, it depends. For example risk parity is common knowledge but it still beats the market. You don't really need any secret sauce to use it effectively. You could do it, personally, and you would probably do well. However if your strategies are well known people typically won't pay you much (if anything) to manage their money, because a bunch of shops will be offering comparable results with the same thing. Continuing with risk parity: there are walkthroughs of how this works with code and math available online: https://cryptm.org/posts/2020/08/01/parity.html https://cryptm.org/posts/2020/08/01/parity.html Note the alpha, beta, volatility and Sharpe measures comparing a straightforward risk parity strategy to SPY. It's not controversial to anyone in the actual industry that you can beat the market on a risk-adjusted basis. Very often the techniques for doing that are well known and can be levered up to safely beat SPY on a total basis with less overall risk. What's truly difficult (and secret) is beating the market by several standard deviations.

WalterBright 6y ago
The link doesn't show it doing better than the S&P 500.
- fractionalhare 6y ago
  Fair, it's not explicit. I misrecalled the control strategy. But the point still stands for the example in that article: over longer timespans SPY tends to return 7 - 10% or so. It has a beta of 1 (basically by definition). Levering up SPY will give you a better return, but at the cost of exposing you more to market volatility. In comparison the given risk parity strategy has a beta of about 0.5, and a natural return of about 10% (i.e. before leverage). You can safely lever the risk parity strategy to a higher total return than the historical market return without getting your beta beyond 1.
  - WalterBright 6y ago
    If that worked, everyone would do it, and so it would no longer work. There's something wrong with it, even if I can't identify what that something is. Are there any mutual funds or ETFs which follow it?
    - dpkingma 6y ago
      PSLDX is one: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=PSLDX&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... (Disclaimer: this is not an endorsement)
      - WalterBright 6y ago
        It does have an impressive record. 12 years is a good start, but not a long enough track record to prove much. I've been investing for nearly 40 years, and have had many with 12 good years go sour.
      - huac 6y ago
        PSLDX does not dynamically adjust the leverage between stocks/bonds as a typical risk parity strategy would. Not that this is necessarily bad, this fund has a consistent exposure to a duration trade, buying long term bonds and paying short-term borrowing rate. over the last 40 years or so this has been a fantastic trade, as interest rates dropping both raises the price of bonds, propels higher equity values, and lowers the cost of leverage. the downside to this particular fund is the extreme turnover in the fixed income component (only suitable for tax-free accounts) and the interest rate risk; the fund could underperform SPY in a world with increasing interest rates (which is where many traders believe we are now)
    - wocram 6y ago
      Not everyone does everything the best possible way. Almost all people will immediately balk at the idea of using leverage in investing, despite the higher backward-looking risk adjusted returns. This is especially true when it might be statistically better, but in various stretches (eg. Last March) it does worse.
    - 55555 6y ago
  - haltingproblem 6y ago
    You are conflating beta with risk. Beta is just the correlation to the SPY return. There might be an asset (e.g. Oil, dunno but using it here for illustration) which have low SPY correlation but still high volatility. Levering it up 2x will bring you portfolio beta wrt to SPY to 1 but give you drawdowns far greater than SPY.
    - fractionalhare 6y ago
      Yes you're right. I was using beta as a measure of the idiosyncratic volatility, which is incorrect. I concede that point.
ahepp 6y ago
It seems very disingenuous to say "you don't even have to open a textbook" and then link to a quant finance blog doing partial derivatives. That's well beyond the level of math that the average person would consider self-evident. I don't know anything about this blog^[0] , but I wanted to find some charts comparing a well known risk parity fund to more general portfiolios. Trusting that they're accurate, it looks like risk parity performed great in 2008, but hasn't beat the market over longer periods of time. Even measuring from 2007 to late 2020, it appears a 60/40 bond fund has beat it substantially. Thus I'm not really sure what grounds there is to say risk parity beats the market. Certainly not by all measurements. I'm not a huge financial guy though, maybe I'm misunderstanding something? [0] https://www.evidenceinvestor.com/the-all-weather-portfolio-explained/ https://www.evidenceinvestor.com/the-all-weather-portfolio-e...
- fractionalhare 6y ago
  > It seems very disingenuous to say "you don't even have to open a textbook" and then link to a quant finance blog doing partial derivatives. Sorry, I meant you don't need to find a book, you can find the info online.
bugzz 6y ago
One issue I've run into when I looked into strategies like this is that bonds have been an incredible investment over the last ~40 years. Sure, they haven't beaten the S&P500 straight up, but their volatility and max drawdown has been so good that you could have used leverage with them and gotten a portfolio that easily beats the S&P500 with as good or better volatility. The problem for me going forward is that these returns for the last 40 years have been do to falling interest rates. Can the rates keep falling? A little bit more. Will they go negative like some other countries? Maybe? But at some point I have to wonder if this strategy is still viable.

WalterBright 6y ago

The link doesn't show it doing better than the S&P 500.

fractionalhare 6y ago
Fair, it's not explicit. I misrecalled the control strategy. But the point still stands for the example in that article: over longer timespans SPY tends to return 7 - 10% or so. It has a beta of 1 (basically by definition). Levering up SPY will give you a better return, but at the cost of exposing you more to market volatility. In comparison the given risk parity strategy has a beta of about 0.5, and a natural return of about 10% (i.e. before leverage). You can safely lever the risk parity strategy to a higher total return than the historical market return without getting your beta beyond 1.
- WalterBright 6y ago
  If that worked, everyone would do it, and so it would no longer work. There's something wrong with it, even if I can't identify what that something is. Are there any mutual funds or ETFs which follow it?
  - dpkingma 6y ago
    PSLDX is one: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=PSLDX&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... (Disclaimer: this is not an endorsement)
    - WalterBright 6y ago
      It does have an impressive record. 12 years is a good start, but not a long enough track record to prove much. I've been investing for nearly 40 years, and have had many with 12 good years go sour.
    - huac 6y ago
      PSLDX does not dynamically adjust the leverage between stocks/bonds as a typical risk parity strategy would. Not that this is necessarily bad, this fund has a consistent exposure to a duration trade, buying long term bonds and paying short-term borrowing rate. over the last 40 years or so this has been a fantastic trade, as interest rates dropping both raises the price of bonds, propels higher equity values, and lowers the cost of leverage. the downside to this particular fund is the extreme turnover in the fixed income component (only suitable for tax-free accounts) and the interest rate risk; the fund could underperform SPY in a world with increasing interest rates (which is where many traders believe we are now)
  - wocram 6y ago
    Not everyone does everything the best possible way. Almost all people will immediately balk at the idea of using leverage in investing, despite the higher backward-looking risk adjusted returns. This is especially true when it might be statistically better, but in various stretches (eg. Last March) it does worse.
  - 55555 6y ago
- haltingproblem 6y ago
  You are conflating beta with risk. Beta is just the correlation to the SPY return. There might be an asset (e.g. Oil, dunno but using it here for illustration) which have low SPY correlation but still high volatility. Levering it up 2x will bring you portfolio beta wrt to SPY to 1 but give you drawdowns far greater than SPY.
  - fractionalhare 6y ago
    Yes you're right. I was using beta as a measure of the idiosyncratic volatility, which is incorrect. I concede that point.

ahepp 6y ago

It seems very disingenuous to say "you don't even have to open a textbook" and then link to a quant finance blog doing partial derivatives. That's well beyond the level of math that the average person would consider self-evident. I don't know anything about this blog^[0] , but I wanted to find some charts comparing a well known risk parity fund to more general portfiolios. Trusting that they're accurate, it looks like risk parity performed great in 2008, but hasn't beat the market over longer periods of time. Even measuring from 2007 to late 2020, it appears a 60/40 bond fund has beat it substantially. Thus I'm not really sure what grounds there is to say risk parity beats the market. Certainly not by all measurements. I'm not a huge financial guy though, maybe I'm misunderstanding something? [0] https://www.evidenceinvestor.com/the-all-weather-portfolio-explained/ https://www.evidenceinvestor.com/the-all-weather-portfolio-e...

fractionalhare 6y ago
> It seems very disingenuous to say "you don't even have to open a textbook" and then link to a quant finance blog doing partial derivatives. Sorry, I meant you don't need to find a book, you can find the info online.

bugzz 6y ago

One issue I've run into when I looked into strategies like this is that bonds have been an incredible investment over the last ~40 years. Sure, they haven't beaten the S&P500 straight up, but their volatility and max drawdown has been so good that you could have used leverage with them and gotten a portfolio that easily beats the S&P500 with as good or better volatility. The problem for me going forward is that these returns for the last 40 years have been do to falling interest rates. Can the rates keep falling? A little bit more. Will they go negative like some other countries? Maybe? But at some point I have to wonder if this strategy is still viable.