indexes

The costs of alpha

Mon, 10 Mar 2008 07:59:58 -0400

Kenneth French, of Fama-French fame, has drawn attention for a working paper that calculated the cost of trying to generate alpha. The New York Times relates how the Dartmouth finance professor simply added up all the costs of investing--fees, transaction costs and other things--and then deducted the amount they would have paid if they were in indexes. The results show that the costs of investing have been on the rise, even at a time when trading costs collectively were thought to be in decline. In 2007, costs may have hit $100 billion for the first time. The point, according to the Times, is that most people are better off indexing.

For more:
- here's the column

Related Article:
Really, a 130/130 index? Article

Will active ETFs storm the fund market?

Fri, 08 Feb 2008 06:59:54 -0500

It seems like we've been talking about the rise of actively managed exchange traded funds for a long time. But only now are they becoming a reality. The SEC has approved Invesco's Powershares Capital Management's actively traded ETF with some restrictions, paving the way for them to actually be sold. The issue is whether anyone one will want to buy them. Financial News Online notes that the whole idea runs counter to what made ETFs so attractive in the first place, the low cost, transparent, index-based approach. It may take some super returns, which will likely be costly, to put one of these indexes on the map.

For more:
- here's the Financial News Online article

How Kervial did it

Mon, 28 Jan 2008 06:59:55 -0500

The question on everyone's mind is: how did he do it? Societe Generale believes that, Jerome Kervial placed large long bets in one portfolio and then created fake hedges in another portfolio. So instead of hedging, as he was supposed to do, Kervial was effectively speculating that various stocks and indexes were poised to rally. The New York Times notes that risk managers saw several red flags but were apparently satisfied with Kervial's explanations--that some trades were mistakes that he would then cancel. He apparently used access codes pilfered from others to help game the system. Kervial is in custody, and his lawyers are saying that the bank is using the incident to divert attention from its subprime-related woes.

For more:
- here's the New York Times article
- rogue trader in custody Article
- background on the rogue of SocGen Article

Really, a 130/30 index?

Wed, 09 Jan 2008 06:59:57 -0500

The hedge fund industry has been innovating to deliver a range of lower costs products and we've noted the rise of passive funds. But here's question: can one create an index for the 130/30 approach? It seems kind of wacky, but none other than Andrew Lo of the Massachusetts Institute of Technology and Pankaj Patel of Credit Suisse have done so, notes The Economist. If the world buys into the concept, there's money to be made; indexes are still big business in this ETF era. The idea, of course, strains the traditional definition of passive investing. On the one hand, you can create a mechanical system, which is what the authors seem to have done, but that still seems like an active approach, albeit one built on rules. The result would seem to be just one example of a 130/30 strategy not representative of them all. Here's an idea, why not just create an index of the top 30 130/30 funds? It would be a poor man's 130/30 index.

For more:
- here's the article from The Economist
- here's the paper by Lo and Patel

A new Jim Cramer?

Tue, 18 Dec 2007 06:59:57 -0500

Jim Cramer got famous not so much as a hedge fund manager but as a pundit. A mad, whacked out, highly entertaining one who benefited nicely from the stockpicking-as-sport craze. But now in his new book he writes like a staid personal finance guru, hardly a mad trader. Business Week Online notes he's singing the praises of index funds for Pete's sake. He also says that timing the market is a loser's tack. So what gives? You have to wonder if this new Jim Cramer undercuts his image a bit. I mean people tune in to feel better about their stock picks. On the other hand, there's still plenty for him to rant about. As a reminder, here's his now legendary CNBC rant.

For more:
- here's the article

Related articles:
- Cramer in trouble with CNBC
- Ratings are slipping: Is Jim Cramer slipping?

Read more on: Jim Cramer

Smart money flocking to...

Wed, 05 Dec 2007 06:59:57 -0500

So after the credit crunch stuck it to a lot of hedge funds (short-term anyway), where is the hot money flowing? Well, most of the top commodity indexes have fared well lately. And, according to Financial News Online, the class may be poised for a huge jump in asset flow. In part, this reflects strong performance but also the growing acceptance by influential institutions. CalPERS for example, always seen as a trend setter, apparently started a program to put $500 million into commodities on a pilot basis. They are also now buying into more inflation-linked assets, a large proportion of which will be commodities. Of course, all this sounds kind of like a sucker's move. The price of oil and other commodities could do an about face. For the big boys, any additional non-equity diversification is a decent idea.

For more:
- here's the Financial News Online article

More on passive hedge fund strategies

Tue, 30 Oct 2007 07:59:57 -0400

The movement to create investable hedge fund indexes has certainly gathered steam over the last few years. So much so that debate is cropping up about how to deploy the strategy. It's fair to say that hedge fund investors have a lot of options these days. Should you go the passive route? Or the funds-of-funds route? I guess the increase in choice is a good sign. The one knock on the index approach is that at some point you diversify away all the risk, so you'll always end up with muted returns. For some, that might be the point. For others, the point is to take on an additional risk.

For more:
- here's the Investment Dealers' Digest article

Related articles:
- Merrill: Passive hedge fund strategies will emerge
- Passive hedge fund products reflect state of industry
- New passive hedge type coming

CalPERS wants better returns--soon

Tue, 23 Oct 2007 06:59:56 -0400

When your assets get to a certain size, there is one view that holds you can't really expect stock gains over and above beta. CalPERS apparently does not subscribe to that view. Its stock gains have exceeded the market by 25 basis points over the last few years or so, but its want up to 100 points. So it has asked its top money managers for ideas, according to Financial News Online. Goldman Sachs, Morgan Stanley, AllianceBernstein, AQR and others. The ideas were presented recently, and most seem to be along the lines of somehow separating funds to generate beta and alpha. The beta portion would rely on indexes, while the alpha portion would involve a gritty win-lose calculus. Non-generators would be paid only for alpha and would be cut if they don't perform.

For more:
- here's the Financial News Online article

Related articles:
- CalPERS casts its lot with Apollo
- CalPERS a model for other pensions?

Morgan Stanley's big one-day loss: $395 million!

Thu, 11 Oct 2007 06:59:58 -0400

According to a recent SEC filing, Morgan Stanley's quant traders lost a cool $395 million in a single day in August. Ouch. That's got to be some sort of record. Goldman Sachs also got hit by the volatility. In six trading days, it lost more than $100 million. Those losses were more than offset. However, by a gain of more than $100 million on 23 days. The Financial Times notes that these disclosures help explain their 3Q performances. Morgan lost $480 million from quant-style trading, while Goldman Sachs posted a surprising gain that it said was due to timely hedges. The filing shed some, but not a lot, of light on its techniques, which have been the topic of some debate. Goldman bet against various mortgage-related indexes and made bets in the credit default swap market. The real message here is that there is a fine line between huge gains and losses, which is precisely why the market grants these firms such low multiples.

For more:
- here's the FT article

Bear Stearns to launch new hedge fund index

Thu, 27 Sep 2007 06:59:54 -0400

Financial News Online reports that Bear Stearns has launched an index that it claims is the first to allow customers to passively invest in risk-arbitrage strategies. The index includes companies that have received all-cash acquisition offers. It is made up of 25 U.S. companies. The index is rebalanced weekly. Bear Stearns will likely develop some derivatives on the index and similar indexes for Europe. It obviously senses demand for passive products, even at the retail level, as do the many other top banks. Merrill Lynch and Goldman Sachs have also developed passive products, which some think will account for 40 percent of hedge fund sales in about 10 years.

For more:
- here's the Financial News Online article