Stone Ridge All Asset Variance Risk Premium Fund

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BJJ_GUY
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by BJJ_GUY »

Northern Flicker wrote: Thu Apr 08, 2021 5:23 pm I'm sure Stone Ridge does their best to determine fair value when an investor deposits or withdraws from one of their funds, and I'm sure they do their best to value well assets that they purchase for the funds. Nonetheless, mispricing of less liquid assets is always a greater risk than it is for assets with an efficient market for pricing them.
I don't disagree. I was saying that I would guess the vast majority of the assets in the fund were listed options so Stone Ridge was not really in position to alter valuations. For OTC, yeah that can get dicey if it was an instrument without a readily observable reference underlying. Further, once the counter-parties begin to price a variance swap, or some bespoke exotic, no longer tethered to inputs the manager (and admin) can use to replicate the pricing, well then -- that's when you either mark the book with the dealer-provided quote even though you think it's wrong... or you can take the entirely opposite approach, like Infinity Q did (and recently got busted) by making up prices but telling your administrator it's from a third party pricing service. (Of course, we're just saying what they may have done, certainly not implying it to be fact.)
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nedsaid
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nedsaid »

Markets can be very cruel and times of extreme volatility, like March 2020, are times when unique risks show up. Every asset class I am aware of has its own unique risk that rarely occur but are pretty painful when they happen. I have often said that markets have a way of doing the one thing that you would never have anticipated. My guess is that a unique risk, whatever it was, showed up at precisely the wrong time. It has also been noted that liquidity can dry up in a crisis and that makes things even worse. Topping this off was the use of leverage.

So as another poster said, we don't really know what happened, we can only guess. Panic selling by "weak hands"? Margin calls? Were the trading strategies too complex? If you had invested when the fund started, your losses would have been in the low single digits. You can see that 2020 was a tough year but the losses were not unexpected in the context of March 2020 and its extreme volatility. It would be hard for me to say that the fund just blew up particularly when results were just starting to turn positive again. The results below were as of February 2, 2021.

AVRPX - Stone Ridge All Asset Variance Risk Premium Fund

3 Month Return 1.71%
YTD Return 0.70%
1 Year Return -21.17%
3 Year Return -10.78%
5 Year Return -3.02%

This isn't the stuff that would make me want to jump out of an office building window.

Maybe the explanation is even simpler than we would have ever believed. Perhaps Stone Ridge just threw in the towel here, they may have judged that after 5 years that they couldn't make this idea work. They just moved on to something else.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Random Walker »

I had AVRPX right up until it went away. The new fund, SRDAX, I believe incorporates the strategy. If another fund were to arise, solely focused on the variance risk premium diversified across asset classes, I’d again be highly interested. The intuition behind the concept just seems so rock solid to me. Of course, implementation is huge, and I don’t think I’m qualified to know which strategies can get over that real life hurdle.

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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

nedsaid wrote: AVRPX - Stone Ridge All Asset Variance Risk Premium Fund

3 Month Return 1.71%
YTD Return 0.70%
1 Year Return -21.17%
3 Year Return -10.78%
5 Year Return -3.02%

This isn't the stuff that would make me want to jump out of an office building window.
The point is that it was not delivering on its purported role in portfolios if the purpose was to be an alternative to low yielding bonds to diversify equity risk. I don't think it was weak hands that was the problem. I think the problem was that AVRPX had the opposite effect on portfolio performance from what people expected and wanted from a risk management and diversification perspective, so they corrected the problem. I think Peter Lynch had a term for this: di"worse"ification.

There also is an asymmetry: a meltup or meltdown in stocks is a high volatility event, so the variance premium will contribute to the downside when stocks crash, but detract from the upside when stocks rally sharply. The V-shaped market in 3/2020 exhibited high volatility both in falling and in recoverying.
Last edited by Northern Flicker on Sun Apr 11, 2021 11:02 pm, edited 1 time in total.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

Random Walker wrote: Fri Apr 09, 2021 9:36 am I had AVRPX right up until it went away. The new fund, SRDAX, I believe incorporates the strategy. If another fund were to arise, solely focused on the variance risk premium diversified across asset classes, I’d again be highly interested. The intuition behind the concept just seems so rock solid to me. Of course, implementation is huge, and I don’t think I’m qualified to know which strategies can get over that real life hurdle.

Dave
SRDAX packages in one fund style premia, alternative lending, reinsurance premia, variance premia, and one additional one, healthcare royalties. If the collection of individual funds is attractive, SRDAX should be even more attractive with Stone Ridge subsidizing ER at present (appears to be a negative effective ER currently if you remove the leverage cost from the ER).
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Alchemist »

nedsaid wrote: Mon Apr 05, 2021 5:32 pm I posted above the last available performance information on all 4 funds, the information is from Bloomberg. You could do a 3 year chart as of early February 2021 based on my data. It wouldn't be perfect but it would give you an idea. I would be interested in seeing the results of your efforts.
I think I am doing the rough math correctly....

I get a total return of an evenly split portfolio of the Four Hors....I mean Alts...of negative 4.2% for the three year period listed in your previous post. This would have turned $10k into $8,792. It of course gets far uglier when you remember that an advisor fee was necessary for the privilege of owning these dumpster fires.

For comparison, Vanguard Total Bond Market Index (VBTLX) provided a positive 4.83% return and did so with a tiny max draw down of only 2.5%.

The ‘alts’ are exactly as many Bogleheads (including myself..) predicted. Expensive snake oil designed to make the fund companies wealthy and provide disappointment to the fund investors. I also have sympathy for the advisors who no doubt believed the sales pitch of these funds as they are now left with quite the mess to explain to their clients.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

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Northern Flicker wrote: Fri Apr 09, 2021 3:55 pm
nedsaid wrote: AVRPX - Stone Ridge All Asset Variance Risk Premium Fund

3 Month Return 1.71%
YTD Return 0.70%
1 Year Return -21.17%
3 Year Return -10.78%
5 Year Return -3.02%

This isn't the stuff that would make me want to jump out of an office building window.
The point is that it was not delivering on its purported role in portfolios if the purpose was to be an alternative to low yielding bonds to diversify equity risk. I don't think it was weak hands that was the problem. I think the problem was that AVRPX had the opposite effect on portfolio performance from what people expected and wanted from a risk management and diversification perspective, so they corrected the problem. I think Peter Lynch had a term for this: di"worse"ification.

There also is an assymmetry: a meltup or meltdown in stocks is a high volatility event, so the variance premium will contribute to the downside when stocks crash, but detract from the upside when stocks rally sharply. The V-shaped market in 3/2020 exhibited high volatility both in falling and in recoverying.
I suspect Stone Ridge was executing this strategy across too many asset classes as well, it wasn't just stocks as I recall. My attitude towards these Alternative Investments was skeptical but I did root for these strategies to win. My limited personal experiences with Liquid Alts was disappointing. A nice story but most of these just did not deliver.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nedsaid »

Alchemist wrote: Sat Apr 10, 2021 7:43 am
nedsaid wrote: Mon Apr 05, 2021 5:32 pm I posted above the last available performance information on all 4 funds, the information is from Bloomberg. You could do a 3 year chart as of early February 2021 based on my data. It wouldn't be perfect but it would give you an idea. I would be interested in seeing the results of your efforts.
I think I am doing the rough math correctly....

I get a total return of an evenly split portfolio of the Four Hors....I mean Alts...of negative 4.2% for the three year period listed in your previous post. This would have turned $10k into $8,792. It of course gets far uglier when you remember that an advisor fee was necessary for the privilege of owning these dumpster fires.

For comparison, Vanguard Total Bond Market Index (VBTLX) provided a positive 4.83% return and did so with a tiny max draw down of only 2.5%.

The ‘alts’ are exactly as many Bogleheads (including myself..) predicted. Expensive snake oil designed to make the fund companies wealthy and provide disappointment to the fund investors. I also have sympathy for the advisors who no doubt believed the sales pitch of these funds as they are now left with quite the mess to explain to their clients.
Three of the four were disappointments, only LENDX or the Alternative Lending fund did well.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Random Walker »

Alchemist wrote: Sat Apr 10, 2021 7:43 am
nedsaid wrote: Mon Apr 05, 2021 5:32 pm I posted above the last available performance information on all 4 funds, the information is from Bloomberg. You could do a 3 year chart as of early February 2021 based on my data. It wouldn't be perfect but it would give you an idea. I would be interested in seeing the results of your efforts.
I think I am doing the rough math correctly....

I get a total return of an evenly split portfolio of the Four Hors....I mean Alts...of negative 4.2% for the three year period listed in your previous post. This would have turned $10k into $8,792. It of course gets far uglier when you remember that an advisor fee was necessary for the privilege of owning these dumpster fires.

For comparison, Vanguard Total Bond Market Index (VBTLX) provided a positive 4.83% return and did so with a tiny max draw down of only 2.5%.

The ‘alts’ are exactly as many Bogleheads (including myself..) predicted. Expensive snake oil designed to make the fund companies wealthy and provide disappointment to the fund investors. I also have sympathy for the advisors who no doubt believed the sales pitch of these funds as they are now left with quite the mess to explain to their clients.
Pretty strong statement based on 3 years performance data. You could well be right, and the strong statement warranted, only time will tell. But 3 years is very short. All sorts of excuses can be made for the individual funds:
Bad performance of value for QSPRX
Calif wildfires and hurricanes for SRRIX
COVID unemployment for LENDX
COVID equity hit for AVRPX
We’ll just have to see over time. Potentially there will always be an excuse. Alternatively, maybe it is just a convergence of some uncorrelated bad luck over last few years.

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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

The nice thing about diversifying equity risk with a mix of treasuries and TIPS is that wildfires, hurricanes, weak advisor hands, long run of negative value premium etc. do not have to cooperate for equity risk to be diversified.

When people talk about diversifying across multiple sources of risk and return, market beta is treated as a single source of return, on equal footing with other single sources. Just because market beta is aggregated into a single variable in a linear (factor) model does not make it a single source of return. US equity beta is correlated with the performance of most of the US economy with many sources of return across many industry sectors. Diversifying market beta with 1/8 as much variance swap premium is suggesting that the variance swap premium is as robust and important as 1/8 of the US economy as a source of return.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Alchemist »

Random Walker wrote: Sat Apr 10, 2021 10:23 am Pretty strong statement based on 3 years performance data. You could well be right, and the strong statement warranted, only time will tell. But 3 years is very short. All sorts of excuses can be made for the individual funds:
Bad performance of value for QSPRX
Calif wildfires and hurricanes for SRRIX
COVID unemployment for LENDX
COVID equity hit for AVRPX
We’ll just have to see over time. Potentially there will always be an excuse. Alternatively, maybe it is just a convergence of some uncorrelated bad luck over last few years.

Dave
The strong statement is warranted not because of the time frame, but because the Alt investment strategy has completely failed in its purpose. Larry Swedroe advocated for them on this board and in an entire book with the argument being that they would reduce risk in a portfolio. The specific phrase of ‘bond like volatility with equity like returns’. Well, I do not think >20% drawdowns during crisis is ‘bond like’ volatility. It would be like if I was selling a safe, high quality bond fund to safely store money and within three years it dipped 30% while providing a negative nominal return.

You’d think my “safe bond fund” was poorly designed if it did that.

The alt strategies are very expensive with ER’s north of 2%. They also come with advisor fees for access and are extremely illiquid. Investors in these strategies would have been far better off keeping this part of their allocations in bonds or even cash/CD’s. Or as Northern Flicker points out:
Northern Flicker wrote: Sat Apr 10, 2021 6:55 pm The nice thing about diversifying equity risk with a mix of treasuries and TIPS is that wildfires, hurricanes, weak advisor hands, long run of negative value premium etc. do not have to cooperate for equity risk to be diversified..
If one is to pay an advisor for advice, that advice should at least do no harm. If the advisor has puts their clients in a worse position than buying a simple index fund then they are not doing their job.

If anyone wants a conservative hands off investment, I’d recommend Vanguard Balanced Index fund which keeps an automatic 60/40 AA for a mere 0.07% ER. No fuss and no sales pitches with higher return and lower risk than these “expert” portfolio managers and advisors have been providing.
Last edited by Alchemist on Sun Apr 11, 2021 7:03 am, edited 1 time in total.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nisiprius »

Random Walker wrote: Sat Apr 10, 2021 10:23 am...But 3 years is very short...
Indeed it is. But so is the life span of the average Stone Ridge fund.

In about seven years, they have introduced a total of nine funds (reinsurance, US variance, international variance, (global?) variance, alternative lending, longevity, hedged equity, multi-strategy, and bitcoin) of which only five have survived. To date, then, I think the average life expectancy of a Stone Ridge fund has been less than four years.

I question if we ever will have much more than three years of data to look at?
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Northern Flicker
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

A portfolio diversified with alts does not have to be expensive, and does not require an advisor charging an AUM fee:

https://investor.vanguard.com/mutual-fu ... olio/vpgdx

I do not invest in VPGDX and have no idea if I would prefer it to a conventional portfolio.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by typical.investor »

Random Walker wrote: Sat Apr 10, 2021 10:23 am
Pretty strong statement based on 3 years performance data. You could well be right, and the strong statement warranted, only time will tell. But 3 years is very short. All sorts of excuses can be made for the individual funds:
Bad performance of value for QSPRX
Yet, the fund says it targets four different style strategies and aims to provide positive absolute returns in both rising and falling markets.

In any case, if value determines its returns, why hold it instead of having value exposure?
Random Walker wrote: Sat Apr 10, 2021 10:23 am Calif wildfires and hurricanes for SRRIX
Perhaps, but if you had been reading industry reports, you'd have seen there's been questioning of the sector's ongoing profitability given the inflow of alternative capital into the market. My discussion of which drew insults from Swedroe and removal from the moderators. I mean sure disasters are unpredictable, but given what we know about global warming, I don't think extreme weather should be all that unexpected. Perhaps this will eventually turn into higher premiums for the reinsurers.

In the meantime, per their most updated statement:

5-year period ended 10/31/2020
SRRIX -1.94%
3-Month U.S.Treasury Bill Index 1.20%

Since Inception (12/9/13)
SRRIX 0.91%
3-Month U.S.Treasury Bill Index 0.88%

And that's before your advisor's fee.

To me, there is a risk that too much alternative capital pushes down the premiums such that the funds aren't so profitable especially in the face of extreme weather. I am happy to hold my share of reinsurers, but I don't really see the need to overweight them.
Random Walker wrote: Sat Apr 10, 2021 10:23 am COVID unemployment for LENDX
COVID equity hit for AVRPX
By the same token though, equities in general also faced the wrath of COVID.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

Although it is difficult to distinguish unlucky outcomes from mispricing of actuarial risk with an insurance product, it would not be a surprise to me that a fund manager buying slices of reinsurance portfolios but not employing an actuarial staff to value the investments may well have overpaid for the investments. The reinsurance company selling a slice of their reinsurance portfolio would seem to have much greater information about the portfolio at the times they choose to sell slices than the fund managers buying a slice, a significant asymmetry. Having the fund run by former insurance executives is not a substitute for having an actuarial staff to value the liabilities.
Last edited by Northern Flicker on Mon Apr 12, 2021 1:10 am, edited 1 time in total.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nedsaid »

Northern Flicker wrote: Sun Apr 11, 2021 3:18 am Although it is difficult to distinguish unlucky outcomes from mispricing of actuarial risk with an insurance product, it would not a surprise to me that a fund manager buying slices of reinsurance portfolios but not employing an actuarial staff to value the investments may well have overpaid for the investments. The reinsurance company selling a slice of their reinsurance portfolio would seem to have much greater information about the portfolio at the times they choose to sell slices than the fund managers buying a slice, a significant asymmetry. Having the fund run by former insurance executives is not a substitute for having an actuarial staff to value the liabilities.
I would like more information about this. Who actually managed the fund and did they use actuaries? It would seem to me that properly valuing reinsurance contracts would be a big part of the business and it is hard for me to believe that Stone Ridge left this out. Sort of like running an actively managed mutual fund without a staff of analysts. Larry Swedroe did say something to the effect that Stone Ridge invested in the same stuff that the big boys did.

If what you are saying is true, the retail investors were the suckers and Stone Ridge didn't quite know what they were doing. When you are attempting to do something like what Stone Ridge was doing, it is important that you attract the best talent available, how good were the managers at Stone Ridge? I don't know.

What I will say is that their Alternative Lending fund has done well, hard to believe that the managers didn't have had a set of credit analysts evaluating the loans that were purchased. In other words, if they hired credit analysts for one fund, wouldn't they have hired actuaries for the other?

The other thing I don't know is how the Reinsurance Industry in general was doing during those time periods. If the industry was having a tough time then Stone Ridge doesn't look so bad.

I also know that Buckingham did a lot of due diligence on these funds, they would have tackled the fundamental questions that you asked. You are assuming that Stone Ridge was just incompetent, which I believe wasn't the case.

My best guess is that lots of Hedge Fund and other institutional money flooded into this market, making it much harder for this strategy to be a big winner. We saw this with Commodity Futures. Huge inflows of money can distort markets. I will also say that the level of talent you can attract makes a big difference. It could be a case of bad luck.

What I would do is read the reports from the fund itself which should give an explanation for what happened. Why not read and report back?
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nedsaid »

nisiprius wrote: Sat Apr 10, 2021 9:19 pm
Random Walker wrote: Sat Apr 10, 2021 10:23 am...But 3 years is very short...
Indeed it is. But so is the life span of the average Stone Ridge fund.

In about seven years, they have introduced a total of nine funds (reinsurance, US variance, international variance, (global?) variance, alternative lending, longevity, hedged equity, multi-strategy, and bitcoin) of which only five have survived. To date, then, I think the average life expectancy of a Stone Ridge fund has been less than four years.

I question if we ever will have much more than three years of data to look at?
You have raised an interesting question. They are trying to execute Hedge Fund like strategies. I would ask another question. What is the average lifespan of a Hedge Fund? How does this compare with Stone Ridge?
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by DaufuskieNate »

While I agree that capital has flooded into the reinsurance market causing downward pressure on premiums, this is not a unique issue. Central Banks globally have poured liquidity into the capital markets causing forward-looking returns to plummet. Look no further than negative real rates on bonds and very high CAPE ratios on U.S. stocks for evidence.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

nedsaid wrote: I would like more information about this. Who actually managed the fund and did they use actuaries? It would seem to me that properly valuing reinsurance contracts would be a big part of the business and it is hard for me to believe that Stone Ridge left this out. Sort of like running an actively managed mutual fund without a staff of analysts. Larry Swedroe did say something to the effect that Stone Ridge invested in the same stuff that the big boys did.
I have not found any evidence on the Stone Ridge web site of them having an actuarial team evaluating the products, but I've not done a scorched earth search on the matter either. Although they buy slices of reinsurance portfolios from reinsurance companies who did the actuarial analysis when they acquired a contract, the reinsurer is also looking at their entire portfolio from a risk diversification perspective.

They may choose to sell slices when they want to further diversify risk concentrations they have identified. If they want to reduce a particular position, they may sell slices and reinvest in contracts that avoid the particular risk they are trying to shed. The reinsurer knows their portfolio characteristics well, and decides when to sell slices. The SRRIX fund does appear to hold globally diversified risk profile, a good thing.

I would want there to be actuarial staff looking at the entire portfolio of risk in addition to ensuring that individual positions have adequate compensation for risk in the premiums generated. I have not seen evidence of this, and have not been able to confirm that it is taking place. Of course, I would work harder to confirm it if I were considering investing in this fund through some available mechanism.
Last edited by Northern Flicker on Mon Apr 12, 2021 1:01 am, edited 3 times in total.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

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Northern Flicker wrote: Sun Apr 11, 2021 6:12 pm
nedsaid wrote: I would like more information about this. Who actually managed the fund and did they use actuaries? It would seem to me that properly valuing reinsurance contracts would be a big part of the business and it is hard for me to believe that Stone Ridge left this out. Sort of like running an actively managed mutual fund without a staff of analysts. Larry Swedroe did say something to the effect that Stone Ridge invested in the same stuff that the big boys did.
I have not found any evidence on the Stone Ridge web site of them having an actuarial team evaluating the products, but I've not done a scorched earth search on the matter either. Although they buy slices of reinsurance portfolios from reinsurance companies who did the actuarial analysis when they acquired a contract, they also are looking at their entire portfolio from a risk diversification perspective.

They may choose to sell slices when they want to further diversify risk concentrations they have identified. If they want to reduce a particular position, they may sell slices and reinvest in cobtrscts that avoid the particular risk they are trying to shed. The reinsurer knows their portfolio characteristics well, and decides when to sell slices. The SSRIX fund does appear to hold globally diversified risk profile, a good thing.

I would want there to be actuarial staff looking at the entire portfolio of risk in addition to ensuring that individual positions have adequate compensation for risk in the premiums generated. I have not seen evidence of this, and have not been able to confirm that it is taking place. Of course, I would work harder to confirm it if I were considering investing in this fund through some available mechanism.
Thank you. This gets to be pretty sophisticated in a hurry.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

As I understand it, reinsurance companies sell slices of their reinsurance portfolio with contracts that would essentially be de facto actuarial risk swaps. There is unlikely to be much of a secondary market for these, so this depends on the interval structure functioning as expected.

The asymmetry that concerns me is that the timing of a purchase by SRRIX is likely driven by having cash to invest. The timing of a sale by the reinsurer likely is a business decision, and they would have detailed knowledge of their actuarial risk profile as a guide for when to offer the slices.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nedsaid »

Northern Flicker wrote: Sun Apr 11, 2021 10:21 pm As I understand it, reinsurance companies sell slices of their reinsurance portfolio with contracts that would essentially be de facto actuarial risk swaps. There is unlikely to be much of a secondary market for these, so this depends on the interval structure functioning as expected.

The asymmetry that concerns me is that the timing of a purchase by SSRIX is likely driven by having cash to invest. The timing of a sale by the reinsurer likely is a business decision, and they would have detailed knowledge of their actuarial risk profile as a guide for when to offer the slices.
Somewhere, I did a research project and I strung together some of Larry's posts regarding the 4 Alternatives he recommended. Specifically, SSRIX was mentioned and he addressed the issue of buying slices of reinsurance contracts. Foggy memory recalls discussion of cat bonds. You could probably find it somewhere, I don't recall the subject of actuaries being covered in the discussion.

I am pretty unlikely to buy AQR or Stone Ridge products so my interest is pretty limited. I might do a search and post what I found.

Edit: here is one such thread.

viewtopic.php?f=10&t=250696

Here is another one:

viewtopic.php?f=10&t=290988
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

They did hold some CAT bonds the last time I looked at their portfolio, but it was somewhere around 15% of assets if I remember correctly.

They do say this in the prospectus, which suggests they may rely on the risk modeling done by the seller or broker for what they are buying if I am interpreting the text correctly.
Risk-Modeling Risk. The Adviser, in selecting investments for the Fund, will generally consider risk models created by independent third parties, the sponsor of a reinsurance-related security or a broker. The Adviser may also consider its own risk models based on comparable prior transactions, quantitative analysis, and industry knowledge. Risk models are designed to assist investors, governments, and businesses understand the potential impact of a wide variety of catastrophic events and allow such parties to analyze the probability of loss in regions with the highest exposure. The Adviser will use the output of the risk models before and after investment to assist the Adviser in assessing the risk of a particular reinsurance-related security or a group of such securities. Risk models are created using historical, scientific and other related data, and they may use quantitative methods. Because such risk models are based in part upon historical data and averages, there is no guarantee that such information will accurately predict the future occurrence, location or severity of any particular catastrophic event and thus may fail to accurately calculate the probability of a trigger event and may underestimate the likelihood of a trigger event. Securities or other investments selected using quantitative methods may perform differently from the market as a whole or from their expected performance for many reasons, including factors used in building the quantitative analytical framework, the weights placed on each factor, and changing sources of market returns, among others. In addition, any errors or imperfections in a risk model (quantitative or otherwise), analyses, the data on which they are based or any technical issues with the construction of the models (including, for example, data problems and/or software or other implementation issues) could adversely affect the ability of the Adviser to use such analyses or models effectively, which in turn could adversely affect the Fund’s performance. Risk models are used by the Adviser as one input in its risk analysis process for Fund investments. There can be no assurance that these methodologies will help the Fund to achieve its investment objective.
As far as looking at their reports, they will always be able to say that insurance event outcomes were worse than expected if they choose to do so. There is no easy way to distinguish that from having underpriced the liability.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by nisiprius »

Northern Flicker wrote: Sat Apr 10, 2021 10:19 pm A portfolio diversified with alts does not have to be expensive, and does not require an advisor charging an AUM fee:

https://investor.vanguard.com/mutual-fu ... olio/vpgdx

I do not invest in VPGDX and have no idea if I would prefer it to a conventional portfolio.
I realize this might not support your point, but I'm pretty darn sure I would not. The original (unstated) premise seemed to be that their (evolving, active) portfolio would not only outperform a conventional portfolio, but that it would do by so much that it could support perpetual real 5% withdrawals--varying only moderately around 5%--when the "classic" portfolios could only support 4% and only for 30 years.

They gave up on 5% and cut it to 4% just five years after inception, and then they seemed to give up on it completely as a systematic-withdrawal portfolio in 2020.

We now have over twelve years to look at. I'm not sure what is a fair comparison but it has underperformed Wellington (about 60/40, active), Wellesley (about 40/60 and pegged as an "income" fund), Balanced Index (straight 60/40 US), and Lifestrategy Moderate Growth, both in raw return and risk-adjusted return, and not by small amounts:

Source

Image

It's noteworthy that the originally claimed that despite having an aggressive, stock-heavy allocation, they would be able to cut that risk through the use of uncorrelated assets--this is the head of their quantitative investment group explaining it--

Image

yet, the risk has exceeded that of all the funds I compared it with, both in standard deviation and drawdown.

Morningstar currently rates it two stars on risk-adjusted performance relative to its category. I don't have a paid membership so if anyone does and can tell us what their analysts say I'd be interested to know.
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Random Walker
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Random Walker »

nisiprius wrote: Mon Apr 12, 2021 7:34 am
Northern Flicker wrote: Sat Apr 10, 2021 10:19 pm A portfolio diversified with alts does not have to be expensive, and does not require an advisor charging an AUM fee:

https://investor.vanguard.com/mutual-fu ... olio/vpgdx

I do not invest in VPGDX and have no idea if I would prefer it to a conventional portfolio.
I realize this might not support your point, but I'm pretty darn sure I would not. The original (unstated) premise seemed to be that their (evolving, active) portfolio would not only outperform a conventional portfolio, but that it would do by so much that it could support perpetual real 5% withdrawals--varying only moderately around 5%--when the "classic" portfolios could only support 4% and only for 30 years.

They gave up on 5% and cut it to 4% just five years after inception, and then they seemed to give up on it completely as a systematic-withdrawal portfolio in 2020.

We now have over twelve years to look at. I'm not sure what is a fair comparison but it has underperformed Wellington (about 60/40, active), Wellesley (about 40/60 and pegged as an "income" fund), Balanced Index (straight 60/40 US), and Lifestrategy Moderate Growth, both in raw return and risk-adjusted return, and not by small amounts:

Source

Image

It's noteworthy that the originally claimed that despite having an aggressive, stock-heavy allocation, they would be able to cut that risk through the use of uncorrelated assets--this is the head of their quantitative investment group explaining it--

Image

yet, the risk has exceeded that of all the funds I compared it with, both in standard deviation and drawdown.

Morningstar currently rates it two stars on risk-adjusted performance relative to its category. I don't have a paid membership so if anyone does and can tell us what their analysts say I'd be interested to know.
12 years is still pretty short. It effectively represents a single cycle where stocks, especially S&P500, have shot up with quite low volatility and interest rates on bonds have declined some.

Dave
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

My main issue with VPGDX is that the asset allocation has been actively managed to an extent that it seems like tactical asset allocation to me. Until 2020, it had held int'l stock at well above global market cap. I think the change to the current portfolio was in June 2020 but the change from monthly payouts to a managed allocation fund was Feb 2020, leading me to assume that tactical asset allocation will continue. My concern is that market timing risk is erasing the benefit of determining a mean-variance portfolio.

It is a fund I really want to like, but have not yet been able to.
Last edited by Northern Flicker on Mon Apr 12, 2021 11:28 pm, edited 1 time in total.
000
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by 000 »

Random Walker wrote: Mon Apr 12, 2021 7:57 am 12 years is still pretty short. It effectively represents a single cycle where stocks, especially S&P500, have shot up with quite low volatility and interest rates on bonds have declined some.
Maybe true, but if a fund provider abandons the strategy, "not enough time" isn't a defense.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Random Walker »

000 wrote: Mon Apr 12, 2021 5:13 pm
Random Walker wrote: Mon Apr 12, 2021 7:57 am 12 years is still pretty short. It effectively represents a single cycle where stocks, especially S&P500, have shot up with quite low volatility and interest rates on bonds have declined some.
Maybe true, but if a fund provider abandons the strategy, "not enough time" isn't a defense.
Very true

Dave
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by 000 »

Random Walker wrote: Mon Apr 12, 2021 6:45 pm Very true
And sadly this problem isn't limited to alts or interval funds. Even Vanguard has bailed on strategies in its fairly tame active funds (Precious Metals / Mining fund, Energy fund, US Value) usually around the worst time.

For me, the potential of the sponsor changing course is the deal-breaker for active funds except in narrow circumstances.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

000 wrote: Even Vanguard has bailed on strategies in its fairly tame active funds (Precious Metals / Mining fund...
That fund originated in 1984.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by 000 »

Northern Flicker wrote: Mon Apr 12, 2021 10:57 pm
000 wrote: Even Vanguard has bailed on strategies in its fairly tame active funds (Precious Metals / Mining fund...
That fund originated in 1984.
I don't follow your point.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

It had been in existence for over 25 years when they made the change.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by 000 »

Northern Flicker wrote: Mon Apr 12, 2021 11:27 pm It had been in existence for over 25 years when they made the change.
From memory, it changed from Gold & Silver to Precious Metals & Mining (reducing exposure somewhat to precious metals) near the bottom of the previous bear market in PMs and then changed from Precious Metals & Mining to Global Capital Cycles (significantly reducing exposure to PM and PM miners) in late 2019, just before a huge bull run in PMs.
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Re: Stone Ridge All Asset Variance Risk Premium Fund

Post by Northern Flicker »

Asset allocation changes have market timing risk. Nobody can predict the future. I don't think this was an active management decision so much as a change in market position of the product. It is still undesirable for investors in the fund.
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