I like the idea of shorting the S&P and buying global ex-US stocks, but beware that past correlations between markets only provide a rough guess about future correlations.
I’m skeptical that managed futures will continue to do as well as backtesting suggests. Futures are new enough that there’s likely been a moderate amount of learning among institutional investors that has been going on over the past couple of decades, so those markets are likely more efficient now than history suggests. Returns also depend on recognizing good managers, which tends to be harder than most people expect.
Startups might be good for some people, but it’s generally hard to tell. Are you able to find startups before they apply to Y Combinator? Or do startups only come to you if they’ve been rejected by Y Combinator? Those are likely to have large effects on your expected returns. I’ve invested in about 10 early-stage startups over a period of 20 years, and I still have little idea of what returns to expect from my future startup investments.
I’m skeptical that momentum funds work well. Momentum strategies work if implemented really well, but a fund that tries to automate the strategy via simple rules is likely to lose the benefits to transaction costs and to other traders who anticipate the fund’s trades. Or if it does without simple rules, most investors won’t be able to tell whether it’s a good fund. And if the strategy becomes too popular, that can easily cause returns to become significantly negative (whereas with value strategies, popularity will more likely drive returns to approximately the same as the overall market).
I’m skeptical that managed futures will continue to do as well as backtesting suggests.
Me too, I did adjust the return estimate way down from the backtest I quoted, but I can see an argument that managed futures will provide zero excess return in the future.
Regarding momentum, see AQR’s Fact, Fiction and Momentum Investing—specifically, “Myth No. 4: Momentum Does Not Survive, Or Is Seriously Limited By, Trading Costs.”
The paper has a section on why they don’t think managed futures (a.k.a. trendfollowing) will stop working in the near future. Here’s the summary I wrote in my notes (of the relevant section):
Assets invested in trendfollowing peaked in mid-2008 at $210B, and have declined to $120B
All systematic hedge fund strategies have $500B AUM, or 17% of all hedge fund assets
Futures market has grown since 2008, so trendfollowing as a % of futures markets has decreased by more than half
I don’t find this super convincing, it’s definitely still conceivable that trendfollowing strategies could basically stop working, but it’s evidence that trendfollowing is not over-subscribed.
I like this post a good deal.
However, I think you overstate the benefits.
I like the idea of shorting the S&P and buying global ex-US stocks, but beware that past correlations between markets only provide a rough guess about future correlations.
I’m skeptical that managed futures will continue to do as well as backtesting suggests. Futures are new enough that there’s likely been a moderate amount of learning among institutional investors that has been going on over the past couple of decades, so those markets are likely more efficient now than history suggests. Returns also depend on recognizing good managers, which tends to be harder than most people expect.
Startups might be good for some people, but it’s generally hard to tell. Are you able to find startups before they apply to Y Combinator? Or do startups only come to you if they’ve been rejected by Y Combinator? Those are likely to have large effects on your expected returns. I’ve invested in about 10 early-stage startups over a period of 20 years, and I still have little idea of what returns to expect from my future startup investments.
I’m skeptical that momentum funds work well. Momentum strategies work if implemented really well, but a fund that tries to automate the strategy via simple rules is likely to lose the benefits to transaction costs and to other traders who anticipate the fund’s trades. Or if it does without simple rules, most investors won’t be able to tell whether it’s a good fund. And if the strategy becomes too popular, that can easily cause returns to become significantly negative (whereas with value strategies, popularity will more likely drive returns to approximately the same as the overall market).
Thanks for the comments, Peter!
Me too, I did adjust the return estimate way down from the backtest I quoted, but I can see an argument that managed futures will provide zero excess return in the future.
Regarding momentum, see AQR’s Fact, Fiction and Momentum Investing—specifically, “Myth No. 4: Momentum Does Not Survive, Or Is Seriously Limited By, Trading Costs.”
I was reviewing my notes and I found this paper on managed futures: https://www.aqr.com/Insights/Research/White-Papers/Trend-Following-in-Focus
The paper has a section on why they don’t think managed futures (a.k.a. trendfollowing) will stop working in the near future. Here’s the summary I wrote in my notes (of the relevant section):
Assets invested in trendfollowing peaked in mid-2008 at $210B, and have declined to $120B
All systematic hedge fund strategies have $500B AUM, or 17% of all hedge fund assets
Futures market has grown since 2008, so trendfollowing as a % of futures markets has decreased by more than half
I don’t find this super convincing, it’s definitely still conceivable that trendfollowing strategies could basically stop working, but it’s evidence that trendfollowing is not over-subscribed.