Sep

22

 Here are some thoughts I was considering for the last two hours about the smart beta and negative index [i.e. short ]vehicles:

Walking through Grand Central Station to get to the squash courts as a 20 something, I recall seeing the posts at Fidelity branches with banner marketing of their sector fund offerings with hottest ytd or x period performance. Businesses like Fidelity have many funds so that one of them is always winning and marketable. This is known by all.

Now some companies offer negative and positive each type of return so they always have something that is winning. They skip the sector rotation idea and just go "+ or - , we got it covered" now.

It's a good way to build a business and to get a product always to fit into the asset allocation/efficient frontier models made by the money guides. I can borrow the hedge fund efficient frontier portfolio optimizer, hit a button and make the fund that the allocation experts think should be 50% of their exposure. If I design a strategy that has a return that makes it the largest allocation in a fund of funds portfolio because it is not correlated am I a hoodoo, a charlatan or just smart? Can I raise enough capital to get the positive of the inverse of the fund so I am immune to market moves personally?

As a former fund manager, one of the questions that was normally asked was how much money of yours is in this thing. Are you getting a taste of your own cooking?

If I have a fund that is positive a beta factor and one that is negative this factor, do investors want the manager to put money into both of them and pay himself income on both sides? How does the manager reconcile having negative and positive funds with trying to put money where the mouth is?

To make it simple if there is negative fido fund and positive fido fund, one of them wins, they get the management fees on both sides, have no general market risk, and they can even make income lending positions that they don't have to fully share with investors. It's your fault for not picking the right fund if you fail.

Great business when you are willing to accept that they will never let you into in the most profitable funds (HFT) since they spin-off cash every month, and are handing over fees to a firm that wins because they hedged the value of your relationship in establishing the negative fund.

It was better when a fund went long and short and you could evaluate the skill to luck ratio. Now they just back out of any responsibility for the results because you picked your own beta. They gather hundreds of millions by gaming the asset allocation/efficient frontier model and also by gaming people who think they know how to time markets.

Thinking of it now an answer is to pay the management company based on the time weighted return of the investors even if they timed your negative and positive the funds wrong.


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