The average for the different styles. The average PA return for equity funds is 9.48% (all the 5y returns added, divided by no. of funds, 20) PA then compounded for 5 years is 57% vs 77% index. All the other styles are the same. I supposed if you did manage to pick the top from a particular, you would've outperformed. On average they under perform in absolute terms.
What are you talking about man? You cannot add different styles of fund and take average. They have different styles for a reason. Momo funds and defensive styles have nothing in common.
You can when you are gauging their performance as a manager. Otherwise if a manager had 9 funds which were negative return and 1 that outperformed would you call them a great manager that outperforms the market ? I'm simply putting their overall performance in perspective to take their research conclusion with a grain of salt rather than "if a big fund like AQR can't make long vol work then it dosn't work".
First you started with this When i pointed out one is CAGR and for S&P you are comparing to cumulative return, you decided took their average of entire equity fund line up then compared to S&P. Even this is not right. You need to compare each fund to their respective stated benchmark. Their line up includes several international funds. You can not compare International to Domestic benchmark, Momentum to defensive benchmarks. Funds are given mandate and they have to operate within their mandate. Take your stated example 1 outperforming with 9 funds with -ve return, what if the line up had 1 domestic and 9 emerging market funds. They could still outperform their respective benchmark, but overall average would still fall short of your stated benchmark of SPX. You are entitled for your opinion. AQR is very well respected firm, where their research has made them one of the top asset manager in the world. So investors are voting with their money. You can poke hole in their research, but your arguments are weak.
CAGR is compounded into cumulative return...just like cumulative return can be divided back into CAGR... The global markets is so connected in the modern day that using different equity benchmarks for equity funds is just lame excuse to underperform but still collect fees. But OK that is my view and not the industry's (because they obviously want to protect their fees). I agree AQR is very successful in the funds business with large AUM, doesn't mean their publicly published research is good. “Some amount of healthy skepticism is likely warranted for those who claim to consistently have such exceptional skill.” The long-vol investor is in effect virtually always buying when the trade is expensive and selling when it’s cheap, the authors conclude. They assume if they couldn't find a systematic way of doing it, then no one can do it. Then they regurgitated that long options over long time is a losing strategy. The options exchanges published stats on that ages ago.
Isn't there an arbitrage here? Just do the opposite, right, you will win then even if volatility goes up?
AQR has another paper that looked at option returns more comprehensively through the lens of the leverage embedded in the contracts. They found that the persistently negative returns described in the paper we've been talking about apply to options with higher leverage (percentage change in the contract's price divided by the percentage change in the stock's price): front-month and out-of-the-money options. Longer-dated options had excess returns that were not statistically different from zero. The contracts were delta-hedged daily. They looked at the idea of *buying* ATM longer-dated options and selling OTM shorter-dated options and found that the strategy was profitable and had zero correlation with selling front-month straddles. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2179396