Comments on: Quant Fund AQR Down 5.8% in November http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november.html Sun, 22 Nov 2009 17:32:34 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Yves Smith http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november.html#comment-2233 Yves Smith Sat, 08 Dec 2007 06:04:00 +0000 http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november/#comment-2233 Anon of 12:49 PM,<br/><br/>The problem with that strategy is you generate bigger and bigger bubbles. Lenders are effectively lending against inflated collateral, and the assets cannot generate enough income to retire the debt, and in some cases, not enough to service it either. Hyman Minsky has written about this far more eloquently than I.<br/><br/>The flaw in that thinking is if people have come to doubt the value of the assets, no matter how deeply you cut interest rates, they won't invest. Too many people forget that in the Depression, the Fed DID increase liquidity. They expanded the monetary base, which is what they control directly. But money supply shrank anyhow because no one trusted banks and they pulled their cash out of circulation.<br/><br/>And then you get a Japan situation: the losses of writing down the assets to "fair" value would be so great you have to socialize them. We are doing some of that now as it is. If they system is not permitted to recognize and clear some of the excesses, and instead inflates a bigger bubble, we will eventually have an economic collapse, either a deflationary crisis or sustained inflation to erode the value of the debt. And inflation is destructive to investment and asset values. Anon of 12:49 PM,

The problem with that strategy is you generate bigger and bigger bubbles. Lenders are effectively lending against inflated collateral, and the assets cannot generate enough income to retire the debt, and in some cases, not enough to service it either. Hyman Minsky has written about this far more eloquently than I.

The flaw in that thinking is if people have come to doubt the value of the assets, no matter how deeply you cut interest rates, they won’t invest. Too many people forget that in the Depression, the Fed DID increase liquidity. They expanded the monetary base, which is what they control directly. But money supply shrank anyhow because no one trusted banks and they pulled their cash out of circulation.

And then you get a Japan situation: the losses of writing down the assets to “fair” value would be so great you have to socialize them. We are doing some of that now as it is. If they system is not permitted to recognize and clear some of the excesses, and instead inflates a bigger bubble, we will eventually have an economic collapse, either a deflationary crisis or sustained inflation to erode the value of the debt. And inflation is destructive to investment and asset values.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november.html#comment-2232 Anonymous Sat, 08 Dec 2007 05:49:00 +0000 http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november/#comment-2232 Re Calc Risk: What the FED actually hopes to do is drive risk-free rates so low(on deposits for instance and other credit-worthy investments in these crazy times, like short-term Treasuries) that savers are literally forced back into a search for yield. They want to keep the game going, so time to impose a "tax" on the savers by forcing rates for creditworthy rates below 0!"<br/>-Satchel<br/><br/>Exactly. This will also hold up asset values in bonds, houses and equities in an attempt to prevent the deflationary collapse. This is the playbook written by Bernanke in his 2002 speech and if you want to bet against Pimco, Greenspan(now consulting for Pimco) and the US in general...be my guest. More than likely, you will be on the wrong side of the trade. Re Calc Risk: What the FED actually hopes to do is drive risk-free rates so low(on deposits for instance and other credit-worthy investments in these crazy times, like short-term Treasuries) that savers are literally forced back into a search for yield. They want to keep the game going, so time to impose a “tax” on the savers by forcing rates for creditworthy rates below 0!”
-Satchel

Exactly. This will also hold up asset values in bonds, houses and equities in an attempt to prevent the deflationary collapse. This is the playbook written by Bernanke in his 2002 speech and if you want to bet against Pimco, Greenspan(now consulting for Pimco) and the US in general…be my guest. More than likely, you will be on the wrong side of the trade.

]]> By: "Cassandra" http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november.html#comment-2203 "Cassandra" Fri, 07 Dec 2007 21:16:00 +0000 http://www.nakedcapitalism.com/2007/12/quant-fund-aqr-down-58-in-november/#comment-2203 I would suggest the recent moves that have hurt AQR and similarly value-oriented, fundamentally-factor-driven strategies, will, in hindsight be seen as "divergent" insofar as their positions are departing further from some intermediate-term equilibrium, rather converging towards the same. <br/><br/>Sure it would be nice to warehouse such "risk" without drawdown, but investors in such strategies would be wise to look forward, rather than backwards, when allocating to these endeavors, and ask their managers to more precisely quantify expected returns (vs. some historical context) given current dispersion in order to try to determine some measure of the prevailing risk vs. reward of the strategies. I believe the comparisons, given honest estimates would be rather compelling in relation to other times and other strategies. I would suggest the recent moves that have hurt AQR and similarly value-oriented, fundamentally-factor-driven strategies, will, in hindsight be seen as “divergent” insofar as their positions are departing further from some intermediate-term equilibrium, rather converging towards the same.

Sure it would be nice to warehouse such “risk” without drawdown, but investors in such strategies would be wise to look forward, rather than backwards, when allocating to these endeavors, and ask their managers to more precisely quantify expected returns (vs. some historical context) given current dispersion in order to try to determine some measure of the prevailing risk vs. reward of the strategies. I believe the comparisons, given honest estimates would be rather compelling in relation to other times and other strategies.

]]>