24 Comments
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Kar Hoe Wun's avatar

Interesting idea for an article! :D

I've been saying for a while now but drawdown control is important and it pays to think about how to reduce drawdowns to maximise your risk-adjusted returns.

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Conor Mac's avatar

Thank you, and well said.

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Kar Hoe Wun's avatar

Recommended. Keep up the good work!

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FIJ's avatar

Great article, but probably isn't so much applicable to a middle age young retiree with a modest portfolio where short term tends to more of a factor than long term goals.

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Conor Mac's avatar

That’s true, can’t appeal to everyone, all the time. Glad you still enjoyed it though. I’m writing something that may be more interesting to you at the moment.

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Tigre's avatar

This is a masterpiece 👍

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Conor Mac's avatar

Thank you 🙏🏼

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T LI's avatar

very interesting piece. two things i thought are interesting:

1) for the LO god portfolio, if we exclude the Great Depression years, max drawdown improves quite a bit

2) maybe im misunderstanding the setup of god's HF portfolio, but if one is able to foresee the future, and always be longing the top decile performers and shorting the bottom decile performers, how is it possible for this portfolio to lose money, let alone -40% drawdown? essentially isnt this the "perfect" market neutral portfolio, in which the long book by definition always outperforms the short book, hence always generate a positive return?

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Conor Mac's avatar

Good points here. Some clarification. He picks the top decline stocks, then rotates once every five years. So he isn't constantly rotating into the highest conceivable alpha. My comment was that his process was "perfect" within the bounds/limitations of the study's mandate.

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Perocco's avatar

Good one. You should also check out AA's pieces on combining value with momentum if you haven't already. Great pic, dall-e?

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Conor Mac's avatar

Do you have any links?

I used Midjourney for the picture :)

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Conor Mac's avatar

This is great thank you! I have read some of the old AQR stuff, but not these ones, so this will keep me busy

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Perocco's avatar

You're welcome! Regarding AQR I would also recommend "20 for Twenty - Selected Papers from AQR Capital Management"

https://aqr.com/-/media/AQR/documents/insights/books/20-for-Twenty.pdf

Paul

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Conor Mac's avatar

This is great stuff 🙏🏼

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Mirko Milito's avatar

The hero we needed!

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Conor Mac's avatar

✊🏼

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Orbs Financial Research's avatar

Great article! Interesting lesson!

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Conor Mac's avatar

Thank you!

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Don's avatar

After a bad year he would rely on his AI and name it Connie and she would then blind him with science. :-)

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James Bailey's avatar

Great piece. Every investor should read it. Digest it. Embody it.

Small aside: did you mean to write “top-decline” performers or “top-decile”? I wasn’t sure.

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Conor Mac's avatar

Thanks James, appreciate that.

As far as the typo is concerned, I have now rectified and updated it, thanks for flagging!

Conor

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Bob Gonzales's avatar

If God were a HF manager he would ban them from the Gates of Heaven & provide them w/ a - way ticket to Hell.

The shelf life if the average HF relative to their fee intake has been nothing short of free money without accountability only to see them start up under another name.

Could go on but - my message is pretty clear. The average investor has been better off in a standard index fund tracking performance for marginal fees over time.

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Conor Mac's avatar

I appreciate the comment and the tend to agree that retail investors would be better off sticking to indexing and trying to master discipline than investing in hedge funds.

To be clear, this was more so a study of how God would be treated as a HF manager, with the perfect portfolio, and the irony that he may well end up being "fired" because of loss aversion during the downturns.

Thanks Bob

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