Lowest Cost No Load Mutual Funds

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

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Lowest Cost No Load Mutual Funds And Etfs

This inexpensive ebook will help you in three main ways: It will improve your understanding of investing by summarizing what the research literature actually says does and does not work when investing. It conveniently provides a directory of the lowest cost, diversified no load mutual funds and Etfs available to US investors for direct investing. The book lists over 200 lowest cost, no load mutual funds in 30 global, international, and US stock, bond, real estate, and money market fund asset category tables. It also lists the over 200 lowest cost Etfs in 29 global, international, and US stock, bond, and real estate asset category tables. All these low cost funds are screened from the universe of available funds using objective factors supported by university research and discussed in this ebook. This ebook helps you to put your investing strategy on autopilot. Increase diversification, lower risks, and reduce investment costs, so that you can save a lot of money and time year after year after year.

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Hedge Funds And The Bull Market

Making money in the bull market was easy, so vast portions of the U.S. population got hooked on the stock market. Some of this new interest in stocks was part of a healthy and growing equity culture, in which more and more people invested in diversified stock portfolios through their individual retirement accounts (IRAs), 401(k) plans, and other investment accounts. But some of this interest was not healthy. Some people became obsessed with the stock market, even giving up their more conventional jobs to become day traders. The United States became a market-obsessed culture, in which people watched financial news on television and spent time at parties swapping stories about stocks, mutual funds, star portfolio managers, and so forth. Newspapers advertised mutual funds run by investment wizards who had compiled dazzling performance records. The financial pages became an extension of the sports pages as investors pored over the statistics, and the paychecks, of celebrated financial...

Brief History Of Hedge Funds

The traditional story about the origin of hedge funds is that they were invented in the late 1940s by Alfred Winslow Jones. Jones began life as an academic, pursuing a Ph.D. in sociology at Columbia University in the late 1930s. He worked as a writer for Fortune in the 1940s, where he became increasingly interested in the workings of the financial markets. In 1949 he formed an investment partnership, A.W. Jones & Co., which lays claim to being the first hedge fund. His fund kept going at least through the early 1970s, compiling an impressive long-term record. Jones's fund was what we will later classify as an opportunistic equity hedge fund. Jones's strategy was to invest in individual stocks, taking either a long position (a bet on rising prices) or a short position (a bet on falling prices), depending on the results of his analysis. The total portfolio could be net long (the value of the longs Although it is traditional to consider Jones as the founder of the hedge fund business,...

Hedge Fund Managers and Clients

A hedge fund brings together three very different types of individuals and organizations. First, there are the individuals and organizations who invest in the fund. These are the owners of the assets. This category covers a wide range, including high-net-worth individuals, large pension funds and endowments, and others. Second, there is the manager of the fund, who buys and sells securities on behalf of the owners of the asse ts. This category also covers a wide range, all the way from small firms managing a few million dollars to large organizations managing billions of dollars. Third, there is a category of financial intermediaries, which includes small and specialized firms, as well as financial powerhouses like Goldman Sachs, Morgan Stanley, Merrill Lynch, and others. These firms deliver a broad range of financial services, many of which are indispensable for the hedge fund manage r. And the hedge fund manager has become an increasingly important client of these firms. In this...

Who Will Invest In Hedge Funds

The big question in the hedge fund business now is who will be investing in hedge funds over the next few years. It seems likely that the level of institutional participation will increase, especially if the standard markets do not deliver returns that meet the needs of the large institutions. The great unknown is the extent to which the individual investor will participate in the hedge fund arena, and that depends in large part on what happens and what does not happen in the legal and regulatory arenas. There is currently a fairly sharp divide between the world of hedge funds and the world of mutual funds. Hedge funds are generally organized as limited partnerships that offer a great deal of investment freedom and very little marketing freedom. Mutual funds offer a great deal of marketing freedom and much less investing freedom. But the lines between hedge funds and mutual funds can get blurred. We noted earlier that SEC regulations already allow mutual funds to buy on margin and to...

Who Manages Hedge Funds

Money managers buy and sell stocks, bonds, and other instruments on behalf of the clients whose accounts they manage. Money managers are available in all shapes and sizes. There are large firms that manage hundreds of billions of dollars. This group includes familiar names in the universe of banks, insurance companies, and brokerage firms. It also includes large independent money management firms that were started many years ago by people who left the large banks and insurance companies. And then there are the small independent money managers, the so-called boutiques. Hedge funds are an important part of the boutique money management business. Mutual funds and hedge funds are both commingled accounts. Many underlying investors pool their assets to create a single larger pool of assets that can be properly diversified and that is large enough to command the attention of a skilled money manager. Trade execution will be provided by stockbrokers, bond dealers, and similar providers. The...

Hedge Funds and the Brokerage Community

IMoney managers cannot do their job without stockbrokers. Hedge fund managers depend more heavily on brokerage firms than more traditional money managers. And they depend on the brokerage firms for a wider variety of functions. The major stock brokerage firms Merrill Lynch, Morgan Stanley, Goldman Sachs, and so forth are in fact financial conglomerates that conduct a number of different lines of business. The typical hedge fund needs multiple services from the financial conglomerates, and the typical conglomerate finds that hedge funds are excellent customers for their several lines of business. To understand hedge funds, which tend to be small and specialized, you need to understand the financial powerhouses, which are large and multifaceted. There are three main lines of business that are directly relevant to hedge funds brokerage, trading, and investment banking. The brokerage job divides into several parts execution, clearing, and prime brokerage. Execution is the most familiar...

The Hedge Fund Challenge

Hedge funds are a clear example of active investment management. The active manager tries to earn superior returns through a combination of diligent research, insightful analysis, savvy trading, and intelligent risk management. Some people think of hedge fund managers as hyperactive managers because hedge funds are even further away from index funds than the more traditional active managers. They trade more actively, they use leverage and short selling, and they are willing to make even bigger bets away from the indexes. It is useful to think in terms of a spectrum of active management such as what you see in Figure 5-1. As you move from top to bottom, the money manager has a bigger opportunity to add value through his specific strategy. And this means, of course, that the money manager has a bigger opportunity to subtract value. As the level of manager-specific opportunity rises, so does the level of manager-specific risk. And so do the fees. At the top of the spectrum are index fund...

Hedge Funds Efficiency And Skill

The themes of this chapter bear directly on the question, Where do hedge fund returns come from It is sometimes claimed that hedge funds generate their returns from identifying and exploiting market inefficiencies. This is not true. The required inefficiencies are either nonexistent or are too few to support an entire industry. Hedge funds are looking for good investment opportunities, not for free lunches. Other people will tell you that hedge fund returns are driven entirely by manager skill. Indeed, some people refer to hedge fund managers as skill-driven managers. So the hedge fund manager is very different from the more traditional equity manager, who takes long positions only, and thus benefits from the fact that equity markets tend, over the long term, to go up. The traditional equity manager has the wind at his back, whereas the hedge fund manager has no such help. But this idea requires two crucial qualifications. First, there are some hedge fund strategies that are not...

Mutual Funds and the Internet

The Investment Company Institute estimates that as of 2000, 68 of households owning mutual funds use the Internet, and nearly half of those online shareholders visit fund-related web sites. The Internet increases the attractiveness of mutual funds because it enables shareholders to review performance information and share prices and personal account information. Of all U.S. households that conducted mutual funds transactions between April 1999 and March 2000, 18 bought or sold fund shares online. The median number of funds transactions conducted over the Internet during the 12-month period was four, while the average number was eight, indicating that a The use of the Internet to track and trade mutual funds is rapidly increasing. The number of shareholders who visited web sites offering fund shares nearly doubled between April 1999 and March 2000. to the asset value of the fund. Mutual funds also can be structured as a closed-end fund, in which a fixed number of nonredeemable shares...

Mutual Funds Versus Limited Partnerships

Mutual funds and hedge funds both conduct their operations within a highly complicated regulatory framework. Although the popular press often refers to hedge funds as unregulated investment vehicles, in fact, hedge funds are designed to take advantage of various exemptions, exclusions, and safe harbors that are explicitly provided within the regulatory framework. The underlying regulatory framework is a combination of securities and tax laws. On the tax side, mutual funds and hedge funds both try to conduct their businesses in such a way as to avoid taxation at the fund level. Hedge funds and mutual funds strive to be pass-through entities those on which taxes are paid by the fund investors, not by the funds. On the securities side, there are three crucial laws the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The Securities Act regulates the process by which securities are offered to the general public. Both hedge funds and...

Banking Regulation Hedge Funds And Otc Derivatives

In an unprecedented move, the Working Group issued two very significant reports establishing unified positions on issues of profound significance to the global banking community bank-hedge fund relationships and OTC derivatives markets. The Working Group issued these reports, entitled Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (the 'Hedge Funds Report') and Over-the-Counter Derivatives Markets and the Commodity Exchange Act (the 'OTC Derivatives Report') in April 1999 and November 1999, respectively. The subject that both of these reports have in common is preservation of the OTC derivatives markets and related products and services for the elite US banking organizations, which are the dominant institutions in this extremely lucrative market. The OTC derivatives market is the pinnacle linkage between banking organizations and hedge funds with regard to trading activities. Hedge funds are generally defined as private investment vehicles that are incorporated...

Equity Hedge Funds and Global Asset Allocators

People think of equity hedge funds as hyperactive portfolios that use liberal amounts of leverage and short selling. This is often the case but not always the case. Some equity hedge funds use essentially no leverage and no short selling, and they trade very sparingly. These funds are long term, low turnover, tax efficient investors. They take advantage of the fact that hedge funds have a limited number of investors, each of whom has much less liquidity than he would have in an ordinary mutual fund. If the investors in a fund can get access to their capital only once a year, or perhaps even less frequently, then the fund can have a longer investment horizon than an ordinary mutual fund, and it can invest in more illiquid positions. Benjamin Graham and Warren Buffett ran hedge funds of this kind, and such funds exist today. The more typical equity hedge funds do use leverage and short selling, and they trade fairly actively. As we mentioned earlier, most of the style categories that...

Index Funds The Trend Toward Mindless Investing

Indexing is the practice of buying all the components of a market index, such as the Standard & Poor's 500 Index, in proportion to the weightings of the index and then passively holding them. An index fund manager does not look to buy or sell even at attractive prices. Even more unusual, index fund managers may never have read the financial statements of the companies in which they invest and may not even know what businesses these companies are in. A related problem exists when substantial funds are committed to or withdrawn from index funds specializing in small-capitalization stocks. (There are now a number of such funds.) Such stocks usually have only limited liquidity, and even a small amount of buying or selling activity can greatly influence the market price. When small-capitalization-stock indexers receive more funds, their buying will push prices higher when they experience redemptions, their selling will force prices lower. By unavoidably buying high and selling low,...

Mutual fund G2

General equity funds invest in a range of equities with the aim of outperforming the market as measured by, for example, standard & poor's 500 index. Index funds are invested in the leading stocks which comprise the principal stock market price indices. Strategic funds are very diversified as they invest in all markets, including currency and futures markets. Sector funds specialize in one sector of the stock market. overseas funds consist of the stocks of a foreign country or a group of them, e.g. Japan or Europe. Precious metal funds invest in gold, silver and other high- value metals. Tax-free funds invest in tax-exempt bonds of, for example, US states. Funds of funds spread risk by investing in several mutual funds. Social conscience funds avoid investments in industries or countries subject to moral criticism.

Offshore Funds

Many hedge fund managers offer both a U.S. limited partnership for taxable U.S. investors and an offshore fund for nontaxable U.S. investors and non-U.S. investors. So, for example, a hedge fund manager based in New York might offer an offshore fund whose investors might include a wealthy German industrialist as well as a U.S. corporate pension plan. Both of these investors are already exempt from U.S. taxes. Offshore funds are generally based in tax haven countries such as Bermuda, the British Virgin Islands, or the Cayman Islands. In recent years, Ireland has also become increasingly important as a domicile for offshore funds. These offshore funds are not to be confused with funds that are offered to retail investors in the European Union, Japan, or elsewhere. The countries in which these funds are sold all have regulatory schemes very similar to the SEC scheme that governs mutual funds in the United States. The basic message to the fund manager is the same as in the United States...

Mutual Funds

The Mutual Fund Fact Book published by Investment Company Institute includes information about the mutual funds industry's history, regulation, taxation, and shareholders. Mutual funds are financial intermediaries that pool the resources of many small investors by selling them shares and using the proceeds to buy securities. Through the asset transformation process of issuing shares in small denominations and buying large blocks of securities, mutual funds can take advantage of volume discounts on brokerage commissions and purchase diversified holdings (portfolios) of securities. Mutual funds allow the small investor to obtain the benefits of lower transaction costs in purchasing securities and to take advantage of the reduction of risk by diversifying the portfolio of securities held. Many mutual funds are run by brokerage firms, but others are run by banks or independent investment advisers such as Fidelity or Vanguard. Mutual funds have seen a large increase in their market share...

Investment Objectives

Most equity mutual funds and most hedge funds are designed to deliver long-term growth of capital. The fundamental objective is to Hedge Funds Versus Mutual Funds Hedge Funds Versus Mutual Funds Hedge Funds Mutual Funds deliver a return that will exceed the inflation rate over the investment period, so that the real purchasing power of the investment will increase over time. Some funds are more aggressive than others, some are more tolerant of volatility than others, but the basic idea is to make the investors' assets grow. Equity mutual funds do this by investing in the stock market, which has an upward bias over long time periods. The investment management business is a very competitive business in which the objective is to beat some target rate of return. For an equity mutual fund, there are two targets first, the rate of return achieved by competing money managers and second, the return of some relevant market index. What defines the hedge fund business is that the hedge fund...

Sources Of Return And Risk

For an equity mutual fund, return is determined largely by three factors the performance of the market that the manager invests in the performance of the manager's strategy (sometimes referred to as investment style) and the level of skill that the manager brings to bear. The most important single factor is the performance of the market. When stocks, in general, are down, most equity managers have a tough time making money. But investment outcomes may still vary according to the various styles and strategies used by different managers. For example, 2001 was a difficult year for U.S. stocks The S&P 500 was down 11.9 percent. But the Nasdaq Composite, which had For a hedge fund manager, the market drops out as a source of return, leaving just two factors strategy and skill. The market drops out largely because the hedge fund manager has the ability to take either long positions or short positions. Long positions are positions that make money when the price of the security goes up, while...

Business Relationship

When you invest in a mutual fund, you are hiring somebody to manage your money. When you invest in a hedge fund, you are entering into a partnership with the manager of the fund You and the money manager are coinvestors. The mutual fund manager may have no personal assets at all invested in the fund that he is running. In contrast, the hedge fund manager should have a major personal investment in the fund that he is running. Part of the allure of hedge funds is the opportunity to invest alongside a star. The fundamental premise of hedge fund investing resembles a caveat from another industry You should eat only in those restaurants where the chef eats his own cooking. Most U.S. hedge funds are organized as limited partnerships. The hedge fund manager acts as the general partner of the partnership and bears the ultimate responsibility for managing the portfolio and managing the business of the partnership. The investors in the partnership are the limited partners. The limited partners...

Liquidity And Marketing

The mutual fund manager makes a deal with the general public and the SEC. She wants to sell her fund to the broadest possible audience. In exchange for this freedom, the mutual fund manager is required to offer daily liquidity and is required to operate within SEC limitations on investment strategies and activity. In other words, the mutual fund manager wants to have the broadest possible freedom in marketing and must therefore accept substantial limitations in investing. Mutual funds offer the ultimate in liquidity. Investors can put their money in, and take their money out, on a daily basis. And the funds can advertise their strategies, and their results, to a broad market of retail investors who can contribute small amounts of money and do not have to satisfy any specific requirements of wealth or financial sophistication. The price of access to the retail market is adherence to a complex set of restrictions on investment freedom. There are restrictions regarding leverage, short...

Economic Cycles From 1926 To 2001

To understand the current level of interest in hedge funds, both among individuals and institutions, it is essential to appreciate the extraordinary bull market in U.S. equities that began in 1982. And to appreciate that bull market, it is necessary to consider its historical context. We will begin our story in 1926 since the required data are either nonexistent or of low quality prior to that date.

The Great Bull Market

The stock market found a bottom on September 21 and performed well into early 2002. Then the Enron Arthur Andersen scandal, and a string of similar corporate scandals, created a crisis of confidence. Many investors think that making money in a conventional stock portfolio will be harder for the next several years than it was during the great bull market. Over the full period from 1926 to 2001, stocks returned about 11 percent annually before inflation, about 7 percent after inflation. These figures include the two major disinflationary periods, 1948 to 1965 and 1981 to 2001, when returns (both nominal and real) were much higher than the long-term averages. Many observers think that returns will revert to the mean, or go even lower. Hence the current interest in hedge funds, which offer

Individual Versus Institutional Investors

Businesses need customers, so hedge funds need investors. The community of investors includes both individual investors and institutional investors. Individual investors are real people. In the case of hedge funds, these people will generally be wealthy individuals who comprise the so-called high-net-worth market. The assets that they own fall into two categories taxable assets and tax-exempt assets. The tax-exempt category has become increasingly important over the years as individual investors have taken advantage of individual retirement accounts (IRAs), 401(k) plans, 403(b) plans, and other forms of tax-advantaged investing. There is a subtle difference between the investment profile of a pension fund and the profile of an endowment or foundation. A pension fund faces definite payment obligations. A pension fund that experiences disappointing returns can't simply reduce the level of benefits paid to retirees. But an endowment or foundation does, in theory, have the ability to...

Inside The Brokerage Business

Hedge funds require strong support from the brokerage community, but in return for this they are excellent customers. Hedge funds often trade more actively than more traditional accounts, so they can generate a level of commission dollars that is quite large relative to the size of the asset base. A very large institutional account that has very low turnover might generate, annually, a level of brokerage commissions that is under 1 percent of the assets in the account. For a very active hedge fund, that ratio can get up to 3 to 5 percent or more. Hedge funds are excellent customers of brokerage firms. In addition to being active traders, hedge funds take pride in their ability to respond quickly to new information and new investment ideas. When an institutional equity broker pitches a large institutional account on an investment idea, the pitch often takes the form of a highly organized presentation, which is then followed by committee meetings, deliberation, and quite possibly no...

Trading And Liquidity

Salomon Brothers provides a perfect example of this consolidation. Salomon was once an independent, publicly traded firm well known for its willingness to take risk for its own account. Salomon's trading profits were high, but volatile. Salomon was essentially a large publicly traded hedge fund. Then Salomon merged with other brokerage firms, and it was eventually acquired by the Citigroup financial empire. The Citigroup complex includes commercial banking, investment banking, stock brokerage, insurance, and a host of related financial activities. Mos t important, Citigroup is a publicly traded company whose investors place a higher value on steady earnings than on volatile earnings. The recurring fee income generated by prime brokerage, investment management, and related activities is much more valuable than trading profits, which are highly volatile. This decline in liquidity creates both a problem and an opportunity for the hedge fund community. The problem arises for those hedge...

Conflicts Of Interest Again

The major Wall Street firms are financial conglomerates in which many businesses coexist under one roof. These businesses often complement one another, and sometimes compete with one another. The hedge fund community needs all those businesses, and all those businesses need hedge funds as customers. Given the multiple lines of business, it is important to be watchful for situations in which We also looked at the example of a firm that has both a prime brokerage business and a private banking business. The prime brokerage business serves hedge funds as customers. The private banking business serves wealthy individuals as customers. The private banking clients may want hedge fund investments, and the private bankers may feel some corporate pressure to favor the hedge funds that are important prime brokerage clients. But the funds that are best for the prime brokerage business may not be the funds that are best for the private clients.

The Lure of the Small

Hedge funds tend to be much smaller than mutual funds. The largest mutual funds have almost 100 billion in assets, and there are many funds with assets over 10 billion. In the hedge fund arena, 1 billion in assets is considered very large. Only a few dozen managers have reached that level. Most hedge funds are under 250 million. In the mutual fund business, small funds are often not economically viable, and they may well be shut down unless they are part of a larger mutual fund family that is willing to subsidize the smaller fund. But a hedge fund with less than 250 million in assets can easily be viable if expenses are kept under control and investment performance is good enough to generate meaningful performance fees. Hedge fund managers will often tell you that smaller is better Size is the enemy of quality. The guerrilla investor will beat the large bureaucracy, just as David killed Goliath and Sir Francis Drake's nimble warships defeated the Spanish Armada.

The Great Brain Drain

Consequently, large investment organizations almost always are struggling with some sort of brain drain. Part of the problem is a lateral drain a talented individual at one firm leaves to join another large firm. Wall Street firms are always poaching each other's people. But the problem of more relevance to the hedge fund business is the entrepreneurial drain the talented investor who leaves the large firm to start up her own shop. The big financial rewards are possible only because the level of risk is high. The fledgling hedge fund manager has to run a portfolio and run a small business at the same time. Running a business means dealing with everything from personnel compensation to the color of the carpet. Many wannabe hedge fund managers are not up to the task, so the failure rate is high. In this respect, starting a hedge fund is like any other new business venture. Launching a hedge fund is like buying a lottery ticket The odds of winning are small, but if you win, you can win...

Efficiently Diversified Portfolios

Barton Biggs, global portfolio strategist at Morgan Stanley and one of the best writers on Wall Street, often used the story of the three bears in talking about the outlook for the U.S. stock market. One of the chief drivers of the bull market of the 1980s and 1990s was an economic background of steady growth with stable or falling inflation, the so-called Goldilocks economy. Biggs is a distinguished alumnus of the hedge fund community. He formed Fairfield Partners in 1965 with Richard Ratcliffe, who had been a partner of A.W. Jones. He ran Fairfield until the early 1970s, when he joined Morgan Stanley. Notice that every single pair of sectors shows a positive cross-correlation. Despite the differences among the various sectors, there is still a pronounced tendency for stocks, in general, to move up and down together. Investors who are looking for more complete diversification need to find cases of negative correlation, which requires looking outside the sectors that we have been...

The Tyranny of the Cap Weighted Indexes

The third pillar of the efficient market viewpoint is the idea that index funds are the investment vehicle of choice for the rational investor. The belief in index funds is not merely an idea favored by abstract theoreticians of finance. It is an idea that has also moved into the daily lives of investors, both institutional and individual. The popularity of index funds derives not merely from their academic respectability but also from their historical performance. Passive management became more and more popular as the great bull market of the 1980s and 1990s rolled on. Vanguard's S&P 500 Index fund was launched in 1976 and languished for many years. Its assets are now close to 100 billion. The success of the Vanguard fund inspired many other mutual fund companies to introduce index funds for their retail clients. Indexing has also become an increasingly popular institutional strategy. Reliable statistics are hard to come by, but it is reasonable to estimate that roughly 20 percent of...

Momentum And Concentration

The index fund itself is a buy-and-hold portfolio, but those who invest in index funds are momentum investors. The fund does not respond at all to changes in price. But those who invest systematically in index funds are making bigger and bigger allocations to the hot sectors of the index. For example, if you put money into an S&P 500 Index fund at regular intervals throughout the 1990s, each investment had a bigger and bigger exposure to technology, largely (but

Other Problems With Cap Weighting

In addition to the larger issues raised above, the following three smaller issues should help remove index funds from their pedestal. Market Cap Versus Float The composition of the cap-weighted index is driven by the market cap of the underlying companies, which is simply the number of shares outstanding multiplied by the price per share. But in many cases the number of shares available for purchase in the marketplace the float is much less than the number of shares outstanding. This can produce major distortions. Consider Yahoo, whose total market capitalization was 114 billion at the end of 1999, thus representing 0.9 percent of the S&P 500 Index. But Yahoo's float was only 48 percent of its market cap Only 48 percent of Yahoo's shares were available for purchase in the marketplace. As index funds bought Yahoo to bring its weight up to 0.9 percent, their buying interest was focused on half the outstanding shares, thus they exerted artificial upward pressure on the price. This price...

Leverage Short Selling and Hedging

Hedge funds try to deliver an attractive rate of return that has a low correlation with the standard investment markets. In pursuit of this objective, most hedge funds use leverage or short selling or both. But there are some hedge funds that do not take advantage of this freedom. Conversely, most traditional managers do not use either leverage or short selling. But some traditional managers do use these strategies sparingly, and even mutual funds may use these strategies within defined limits.

Long Volatility Versus Short Volatility

Some hedge fund strategies tend to be long volatility others tend to be short volatility. Convertible hedging and trend-following futures trading tend to be long volatility strategies. Risk arbitrage and bond hedging tend to be short volatility strategies. And some strategies, or managers, combine elements of both. The contrast between long volatility and short volatility sounds clear and absolute, but the difference is really a difference of degree. At the extremes, there is a clear contrast between a 99 percent chance of a small win and a 1 percent chance of a big win. But when the probabilities are less extreme, the distinction gets blurred. And in the real world, where the probabilities are hard to measure in the first place, the situation becomes even more blurred.

Momentum And Contrarian Investing

Many hedge funds try to deliver substantial capital appreciation while keeping the losses under control. This pattern of returns is very similar to the pattern of returns associated with owning an option. And to replicate that pattern of returns, the manager winds up buying on strength and selling on weakness. Thus the manager behaves like a momentum-driven investor. This does not mean that hedge fund managers are adhering slavishly to some sort of option replication program. It just means that some of their trading strategies, when viewed from a distance, look like options-inspired strategies.

Legal and Regulatory Issues

We have spent a lot of time looking at investment issues related to hedge funds investment objectives, strategies, techniques, and so forth. The next few chapters take a brief look at some of the business and operational issues that arise in the hedge fund world. This chapter focuses on the regulatory framework within which hedge funds operate. Then we move on to performance fees, and then to tax issues. Hedge fund managers use a number of different legal structures to make their strategies available to clients. The delivery system can be a limited partnership, a limited liability company, an offshore fund, a commodity pool, or even a specialized separate account. We will begin with the contrast between mutual funds and limited partnerships and then move on to the contrasts between limited partnerships and the other vehicles.

The Outlook For Future Regulation

They change in response to changes in the financial environment, in response to crises, and in response to the activities of special interest groups. The Long Term Capital Management debacle was an especially important crisis. In the immediate aftermath of that crisis, there was a widespread sense that something should be done. And there was widespread fear within the hedge fund community that overzealous regulators would implement new rules that would create huge administrative burdens, Regulators quickly realized that the hedge fund community is very difficult to police on a regular basis. There are thousands of funds, many of them very small, and many of them located offshore, well beyond the regulatory jurisdiction of U.S. authorities. So attention shifted quickly from the hedge funds themselves to the small number of large financial institutions that lend to the hedge funds. These are the large commercial banks, investment banks, and stock brokerages....

An Overview of the Menu

We pointed out at the very beginning of this book that hedge funds, like mutual funds, are available in a bewildering variety of strategies, styles, and flavors. But the universe of hedge funds divides naturally into four main strategy groups equity hedge funds, global asset allocators, relative-value managers, and event-driven managers. The object of this chapter is to take a general look at the broad menu of strategies. We will begin with a brief description of the main groups and subgroups. Then we will look at the historical performance of the various strategies, paying attention both to return and to the multiple dimensions of risk. The performance review is an aerial reconnaissance in two stages. We survey the five main strategies from 20,000 feet, then drop down to 10,000 feet for a closer look at the substrategies.

The Main Strategy Groups

Equity Hedge Funds Equity hedge funds are active equity managers who have the ability to use leverage and to sell short. Like more traditional equity managers, they spend most of their time analyzing individual companies and individual stocks. Unlike traditional equity managers, they are not interested in beating the S&P 500 Index or some other passive equity benchmark. Their basic mandate is to produce an attractive positive return, independently of whether the market is going up or down. The category of equity hedge funds divides into a number of subcategories, most of which are borrowed from the familiar world The most important new distinction relates to directional bias. It is useful to divide equity hedge funds into three main categories long biased, short biased, and opportunistic. Long-biased managers will tend to be net long the market all the time. At our firm, the rule of thumb is that a long-biased manager will be at least 50 percent net long all the time, so a substantial...

The Historical Record

The figures in this section display the performance record of the basic strategies for the period beginning January 1990 and ending December 2001. Since we are now at 20,000 feet, we show only the four main groups, with one twist The short sellers are separated from the other equity hedge funds because of their distinctive risk-return profile. The data are based on the EACM 100 Index, which is described more fully in Appendix I. Equity hedge funds 0 Equity Hedge Funds Global Asset Allocators Calculations are based on monthly rates of return for Jan uary 1990 through December 2001. Hedge fund strategies (relative value, event driven, equity hedge funds, global asset allocators, and short sellers) are based on strategy components of the EACM 100 Index. Traditional assets are based on the following indexes S&P 500 Index (U.S. equity), Lehman Brothers Government Credit Index (U.S. bonds), Merrill Lynch 3-month U.S. Treasury Bill (T-bills), and MSCI EAFE USD (international equity)....

Global Asset Allocators

Equity hedge funds care about individual stocks and individual companies. Global asset allocators care about broad markets and broad themes. The global asset allocator will focus on stock market indexes, long-term and short-term interest rates, currencies, and the physical commodity markets oil, gold, the agricultural commodities, and so forth. With respect to each market, the global asset allocator may be long, or short, or have no net position.

Discretionary Ma Nagers

The kind of fundamental analysis carried out by the global asset allocator is not at all unique to the hedge fund community. It is essen The difference between a global asset allocator and a more traditional globally oriented manager is not in the style of analysis or the valuation conclusions. The difference lies in what the manager does with the conclusions. In the traditional money management world, the manager who worries about the state of the Japanese economy will simply be underweight in Japanese equities, and might even have zero exposure to Japan. In the hedge fund world, the manager has the ability to take a short position in Japanese equities. Similarly, if a traditional manager is worried that oil prices may be poised for a sudden upward move, then the only available option is to buy the stocks of oil-related companies that will benefit from that move. The hedge fund manager has the freedom to buy crude oil futures or to take a short position in bonds or other instruments...

Relative Value Investing

Relative-value managers are hedge fund managers who try hard to be hedged. The relative-value investor generally operates within one particular market and does not want to be net long or net short in the market in which she is operating. Her object is to focus on relative valuation within that market, taking long positions in what looks cheap and short positions in what looks expensive. The long and short positions are then balanced in such a way as to offset each other. In theory, returns will not be affected by whether the underlying market goes up or down. Returns will be determined entirely by the skill of the manager in making judgments of relative value within the market. Hedge funds are usually not interested in being simultaneously long and short the same instrument. They are interested in being long and short in related instruments. So there is always some element of risk present, generally referred to as basis risk. Basis risk is the risk that the relationship may move in...

The Reorganization Process

The categories above apply to publicly traded bonds. But there is also nonpublic debt, of which the most important categories are trade claims and bank debt. Bank debt is simply money lent by a bank (or a syndicate of banks), which is often senior to the company's public debt. Trade claims are claims against the company presented by suppliers to the company. Suppose, for example, that you are a clothing manufacturer who has just sold merchandise worth 1 million to a chain of discount stores. You expect to get paid in one month. Then the retailer goes bankrupt. The retailer owes you money, and your claim against the retailer stands very senior in the pecking order. But the fact is that your claim is now tied up in the reorganization process, so you won't see any of that money for several years. If the retailer owes you 1 million, you might be happy to sell your claim to a hedge fund for a reduced price and let the hedge fund deal with the headaches. Although bank debt and trade claims...

Hedging Versus Speculation

Sometimes hedge funds take short positions simply to make money. They buy stocks that they think are going to go up and short stocks that they think are going to go down. This is officially classified as speculation, since the object of the short selling is to increase return. But sometimes hedge funds take short positions in order to hedge. The object here is not to increase return but to reduce the risk that is already present in the portfolio. In most forms of hedging, the long position and the short position are not identical. So there is some element of basis risk in the trade. Basis risk is the risk that the long and the short may not exactly cancel each other out. When hedge fund managers put on hedged trades, they do so in the hope that the long position will do better than the short position. Here is another example, which played an important role in the crisis of August 1998. In the early part of 1998, many hedge funds were invested in emerging markets debt that had a very...

Momentum And Risk Management

Selling on weakness may sound cowardly, but it can be the height of prudence. Buying on weakness may sound brave, but it may be merely foolhardy. So every money manager faces a struggle between two opposing instincts. Some managers fall pretty clearly on the momentum side They are quick to take losses. Others fall more clearly on the contrarian side They are more patient about enduring losses and more willing to think about averaging down. The challenge for the investor in hedge funds is to try to figure out where on the spectrum the manager is located. Since skilled managers are reasonable people who try to avoid the extremes, this can be a formidable task.

The Basic Themes

Hedge funds represent a distinctive investment style. Their investment objectives, and their strategies, are very different from more traditional funds. They emphasize absolute return rather than relative return, and they use a very wide range of investment techniques including leverage, short selling, and other hedging strategies in the attempt to achieve their objectives. Hedge funds also represent a distinctive investment culture. Hedge fund management firms tend to be small firms dominated by one or two key investment people. The hedge fund culture is part of the smaller-is-better culture. In addition, hedge funds give a new twist to the relationship between the money manager and the client. The client does not merely hire the manager. Instead, the client and the manager become partners, coinvesting in situations that the manager finds attractive. Finally, hedge funds often use distinctive delivery systems to make their strategies available to investors. The hedge fund could take...

Cultural Style

There are some very large hedge funds and some very small mutual funds, but in general, hedge funds are smaller than mutual funds. The size difference emerges in two ways Hedge fund portfolios tend to be smaller than mutual fund portfolios, and hedge fund firms tend to be smaller than mutual fund firms. There are many mutual funds with asset bases in the range of 50 billion to 100 billion. But there are no hedge funds in that size category. In the hedge fund world, 5 billion is an unusually large amount of money. Most managers are running funds in the range between 100 million and 1 billion. And there are many funds under 10 million. However, the basic economics of the hedge fund business are such that small funds can still be extremely profitable for the small number of people involved in running the fund. The compensation arrangement in hedge funds is designed to further a smaller-is-better philosophy. Because hedge funds are smaller than mutual funds, they can trade more nimbly...

Performance Fees

In most mutual funds, the money manager earns a fee based entirely on the size of the assets under management. In an equity fund, for example, the fee might be between 0.5 and 1.0 percent of the assets in the fund. This arrangement is great for the money manager since the cost of running a 2 billion portfolio is not 10 times the cost of running a 200 million portfolio. The money management business is a clear example of operating leverage. When assets grow, the revenues grow faster than the expenses, so profit growth can be very handsome indeed. But this also means that the mutual fund business rewards size more directly than it rewards performance. A fund that performs well will attract additional assets, but there is no direct financial link between the fund's performance and the manager's compensation. This means that the mutual fund business is sometimes more focused on gathering assets than on managing assets. In the hedge fund business there is a direct connection between...


Mutual funds and hedge funds are both pass-through entities with respect to taxation. The funds themselves do not pay taxes, but investors in the funds pay taxes on their share of interest, dividends, and realized gains. Mutual funds earn this pass-through status by distributing annually to their investors 95 percent of the taxable income earned by the fund. The investors then have a choice They can keep the distribution, or they can reinvest the distribution in the fund. In either case, the mutual fund investor owes taxes on the distribution. If the mutual fund does not distribute its taxable income, then the mutual fund itself will be vulnerable to taxes, which is an outcome that no mutual fund manager wants. A limited partnership is, by its very nature, a pass-through entity that owes no taxes on the taxable income that it produces. This is true even if the hedge fund does not distribute any of its taxable income. And, generally speaking, hedge funds do not make regular...

Nonus Investors

The hedge fund community has attracted assets both from inside and outside the United States. Non-U.S. investors typically invest in offshore funds, which are domiciled in tax haven countries like Bermuda and the Cayman Islands. These offshore funds may be managed by firms that are located in the United States, but the assets of the funds are located outside the United States. These offshore funds may accept assets from wealthy non-U.S. individuals, as well as non-U.S. institutions. As in the United States, the list of institutions includes pension funds, foundations, and other pools of capital whose investment activities are directed by a group of fiduciaries. Offshore funds may also accept assets from U.S. tax-exempt institutions. Some people think of offshore funds as tax-evasion devices, but this is not the case. Offshore funds accept assets that are already not liable for taxes in the investor's home jurisdiction. No doubt, there are situations in which investors are using...

Funds Of Funds

Many individuals and institutions invest directly in hedge funds. Since the level of fund-specific risk can be very high if the investor uses only one hedge fund, informed investors prefer to invest in a diversified portfolio of hedge funds, often encompassing multiple hedge fund strategies. Depending on the circumstances, the investor may use as few as 4 or 5 funds, or as many as 20 or more. If the hedge fund portfolio includes a large number of managers, then the job of monitoring and managing that portfolio can become a very demanding task. In addition, since hedge funds often have high minimum investments, only very large institutions and very wealthy individuals can afford to be genuinely diversified. This background creates a role for managers of managers, specialized investment firms that create funds of funds. Just as mutual funds offer diversification and professional management for investors who do not have the resources to manage a diversified stock portfolio, so a fund of...


When you look at the trading activities of a large Wall Street financial institution, what you see is essentially a very large hedge fund. On any given day, the Wall Street firm will hold long or short positions in a dizzying variety of stocks, bonds, currencies, and other financial instruments. Sometimes the large Wall Street firms compete with the hedge funds in putting on their positions sometimes the Wall Street firms can help the hedge funds to put on their positions. But there are no free lunches. If somebody is helping you out today, chances are that you will be repaying the favor later on. Today's free lunch will be offset by next week's overpriced dinner.

Investment Banking

Hedge funds are important customers of investment banking departments. For one thing, they are very active investors in the new-issue market. During the peak years of the tech bubble, many hedge funds made handsome profits in the ebullient IPO market. Convertible hedgers are major players in the new-issue market for convertible bonds. And risk arbitrageurs, who invest in companies involved in mergers and acquisitions, are major consumers of the M&A deal flow originated by investment bankers. In all these cases there is a symbiotic relationship between the investment banks and the hedge funds. Neither can survive without the other.

Fear And Greed

But the tech bubble did not create a free lunch. Many smart investors simply moved to the sidelines. They didn't participate in the bubble, but they didn't bet against it either. Those who did bet against it took a lot of risk, and some of them lost a lot of money. Hedge fund managers who took short positions in overvalued tech stocks sometimes found themselves sitting on big losses as the overvalued became the outrageously overvalued. Alan Greenspan warned about irrational exuberance in December 1996, but the tech bubble didn't peak until March 2000. The S&P 500 doubled in the interim. As Lord Keynes famously observed, markets can stay irrational longer than you can stay solvent.

The Role Of Skill

On the other hand, the successful manager may become so impressed with his success that he forms a totally inflated idea of his own capabilities. He begins to take bigger risks, in the desire to succeed even more dramatically. He develops the sense that he can do no wrong. And the result is some sort of dramatic blowup. Here the competitive edge gets out of control and leads to disaster. The newspaper accounts will say that the manager was a victim of his own success. The situation is like that of the test pilot who pushes the envelope until the envelope pushes back, and the plane breaks up. Some of the most conspicuous hedge fund disasters have been the result of a dangerous feedback loop in which success leads to a certain kind of overconfidence, which in turns leads to failure. This pattern is hardly unique to the investment business. Success breeds pride, and pride goeth before a fall. It's what the Greeks called hubris. If an investor has no opinions, she has nothing to do. This...

Cong Ratu Lations

You've just finished the hardest part of this book. And you may be asking Why did I have to go through all this when I just wanted to learn about hedge funds Who really cares about efficient markets, efficient portfolios, and capitalization-weighted indexes The answer is a lot of people. It is difficult to convey to somebody outside the investment business how much that business has been transformed by the ideas that we have been discussing in the last four chapters. Every investment professional has to deal with the challenges of market efficiency, passive benchmarks, and the ideal of the optimally diversified portfolio. And the world of professional money management sometimes seems to be divided into two worlds, or two cultures the world of passive management and the world of active management. The first world is the world of the Ph.D. quants, financial engineers, and rocket scientists. The second world is the world of skill, judgment, experience, gray hair, and a lot of other soft...


This very unfortunate scenario could not arise with houses. When banks lend against houses, they take the risk that the house value will decline below the loan value. In these circumstances, the owner of the house may walk away from the mortgage. The bank then assumes ownership of the house and sells the house to recover as much value as it can. There are no margin calls in the home lending business. But there are margin calls in the investment business. When the underlying investments are stocks, government bonds, or other familiar instruments, the percentage down payment requirements are fixed in advance and do not change. When the investments are more exotic, the broker has wide latitude in setting the haircut. And the percentage requirement may go up just as prices are going down. So the leveraged investor faces the possibility of a devastating double whammy The price of the investment declines, and the percentage haircut is raised. Some of the major hedge fund disasters have...

Futures and Options

A s a general rule, hedge funds use futures and options more than traditional active managers do. This is not universally true some hedge funds do not use futures or options at all, and some traditional managers have become very active participants in the futures and options markets. Still, to understand hedge funds, it is important to understand something about futures and options what they are and how they are used.


There are three reasons that the knowledgeable hedge fund investor needs to know about options. First, many hedge funds use options explicitly, either to control risk, or to enhance return, or to deliver some combination of the two results. Second, many hedge funds trade securities that involve options implicitly. For example, a convertible bond is a straight corporate bond plus a call option on the underlying stock. A mortgage-backed bond is a bond whose buyer has sold a call option to the underlying homeowner since the homeowner has the right to refinance her mortgage without penalty. Third, many of the trading strategies employed by hedge funds are related to strategies that try to duplicate the pattern of returns that options generate. For example, the broad distinction between contrarian strategies (buy low, sell high) and momentum strategies (buy high, sell higher) is related to the difference between two different option simulation strategies. The contrarian approach is similar...

Separate Accounts

Mutual funds, offshore funds, and commodity pools are all commingled vehicles. Hedge fund strategies can also be offered in a separate account format. Needless to say, this format is available only to very large investors, who like separate accounts because the investor then has more liquidity and greater access to information. The separate account has greater transparency The investor can look inside the account on a daily basis if she wants to. If the investor is a large institution whose assets are normally held in segregated accounts at a large bank, then the hedge fund separate account will require special arrangements to permit leverage and short selling. There are some very successful hedge fund managers who have been willing to accept separate account assignments from large institutions, but other successful managers prefer to keep their businesses simpler by turning down such opportunities.

Tax Issues

S ome hedge funds are very tax friendly, others are very unfriendly. The friendly funds have a long-term investment horizon and low turnover. A large portion of their total return is in the form of unrealized appreciation. These funds take advantage of the relative illi-quidity of hedge funds to attract a cadre of long-term investors. In many of these funds, investors can redeem their funds only annually, perhaps even less frequently. But most hedge funds are not like this. They engage in more active trading, generate a lot of realized gains and losses, and produce much more complicated tax reporting. In some of these funds, the limited partner may not receive his Schedule K-1 (Form 1065), which supplies all the information that the limited partner requires for a tax return until a time very close to the standard April 15 filing deadline. If you are invested in a fund with high transaction volume and complicated strategies, you may not be able to file your own tax return by April 15....

Closer Look

As we have just seen, relative-value and event-driven strategies tend to be the lower-risk strategies, while equity hedge funds and global asset allocators tend to be higher risk. But this is a generalization. There are high-risk relative-value managers, such as Long Term Capital Management. LTCM focused on relative-value trades, trying hard to avoid directional market risk, but the level of leverage was so high that the result was dangerously high risk. At the other extreme, there are global asset allocators who make directional bets in the global markets but use modest amounts of leverage and impose tight risk management disciplines. Still, as we look at the various substrategies, it makes sense to combine the relative-value managers with the event-driven managers, and to combine the equity hedge Calculations are based on monthly rates of return for January 1990 through December 2001. Specialized hedge fund strategies within the relative-value strategy group (long short equity,...

Before We Continue

To form an intelligent picture of the return potential and risk profile of hedge funds, you need more than the historical numbers. You need to get behind the numbers for a qualitative look at the personality of the various strategies. That is the object of the next three chapters. We will spend more time on the less familiar strategies. Calculations are based on monthly rates of return for January 1990 through December 2001. Specialized hedge fund strategies within the equity hedge funds strategy group (domestic long biased, domestic opportunistic, and global international) and the global asset allocations strategy group (discretionary and systematic) are based on substrategy components of the EACM 100 Index. Traditional assets are based on the following indexes S&P 500 Index (U.S. equity), Lehman Brothers Government Credit Index (U.S. bonds), Merrill Lynch 3-month U.S. Treasury Bill (T-bills), and MSCI EAFE USD (international equity). This means a pretty quick look at equity hedge...

Skill And Capacity

The world of equity hedge funds is essentially the world of active equity management, enhanced with new tools leverage, short selling, and other hedging techniques. In the right hands, those tools will add to return and keep risk under control. In the wrong hands, those tools will detract from return and increase the level of risk. So the skill of the manager is the crucial ingredient. There is no natural source of return for the equity hedge fund manager, no wind at her back. (We are excluding here the long-biased funds, which benefit from the fact that stocks tend to go up over the long term.) As large institutions look to the world of equity hedge funds, they will need to focus on managers who can manage substantial pools of assets. This means a tilt toward managers who invest in large cap and mid cap stocks. Will those managers be able to absorb the new investment flows if they come The main reason for being optimistic is that hedge funds have the freedom to take short positions,...

Books General

Crerend, William J., Fundamentals of Hedge Fund Investing A Professional Investor's Guide. McGraw-Hill, New York, 1998. Bill Crerend is the founder of Evaluation Associates, which is the parent company of Evaluation Associates Capital Markets, Inc. His book is a natural sequel to this book, designed for the professional investor. Swensen, David F., Pioneering Portfolio Management An Unconventional Approach to Institutional Investment. The Free Press, New York, 2000. Swensen has overall investment responsibility for the Yale University endowment, a 10 billion portfolio that was an early investor in hedge funds.

Longshort Equity

The simplest example of a relative-value strategy is what is often called pairs trading. For example, you think Cisco Systems is a fabulous company and that it is substantially underappreciated in the market. But you acknowledge that Cisco faces many risks, some related to markets and the economy in general, some more specifically related to the technology sector. So you are reluctant to take an outright long position in Cisco. However, you are very confident that Cisco is better positioned than Microsoft to weather whatever storms may develop. So you take a long position in Cisco, paired with a short position in Microsoft. You are no longer merely betting that Cisco will go up rather, you are betting that Cisco will do better than Microsoft. Cisco may actually decline in price, but as long as Cisco declines less than Microsoft, the trade will be profitable. The following paragraphs describe three main categories of equity market-neutral hedge funds.

Short Selling

First you deposit money (or securities) into a margin account. Then you use that money as collateral to borrow the Amazon shares. This requires that somebody who owns Amazon be willing to lend you his shares. This is usually not a problem since anybody who owns stock in a margin account has consented to having his stock lent to other investors. The prime broker arranges the borrowing. This means, incidentally, that when a hedge fund manager chooses a prime broker, he will want, among other things, a broker who has excellent access to stock available for borrowing. The short seller operates from a doubly vulnerable position. He accepts unlimited downside in the pursuit of limited upside and pursues a strategy in which mistakes become more and more visible. Experienced hedge fund managers treat their short positions with a vigilance that borders on paranoia. In particular, diversification is even more important on the short side of the portfolio than on the long side. Many managers have...

Growth Versus Value

The hedge fund community, like the mutual fund community, includes managers from every point along the growth-value spectrum. At one end are deep-value managers who are so concerned with price that they often wind up investing in companies that look pretty unappealing. At the other extreme are aggressive growth managers who are so concerned with earnings growth or other measures of corporate excellence that they often pay very little attention to the price that they are paying. This is the growth-at-any-price approach. And then there are all sorts of managers in between, reflecting different ways of managing the tradeoff between cheap stocks and good companies. The growth-at-a-reasonable-price strategy is somewhere in the middle of the spectrum.

Bond Hedging

We emphasized in Chapter 9 that hedging is not an infallible recipe for reducing risk. A hedged position is a bet that the long position will outperform the short position. In the world of bonds, if one bond performs better than another bond, then the yield spread between the two bonds narrows. To see this, suppose that a hedge fund manager has a long position in bond L and a short position in bond S. We assume that the yield on bond L is greater than the yield on bond S, so the hedged position captures a positive spread between the two bonds. If bond L performs better than bond S, then it may be that the price of L goes up while the price of S stays the same. But if the price of L goes up, then the yield of bond L will go down, and so the yield spread between the two bonds will narrow. Alternatively, it may be that L does better than S because the price of L remains constant while the price of S goes down. But if the price of S goes down, then the yield of bond S will go up, and so...

Process Design Development

Before the final process design starts, company management normally becomes involved to decide if significant capital funds will be committed to the project. It is at this point that the engineers' preliminary design work along with the oral and written reports which are presented become particularly important because they will provide the primary basis on which management will decide if further funds should be provided for the project. When management has made a firm decision to proceed with provision of significant capital funds for a project, the engineering then involved in further work on the project is known as capitalized engineering while that which has gone on before while the consideration of the project was in the development stage is often referred to as expensed engineering. This distinction is used for tax purposes to allow capitalized engineering costs to be amortized over a period of several years.

Theories Concerning Leveraging of Strengths

The size of an MNB is not the sole driver of its cost of capital funds. There are a variety of sources of differences in bank cost of capital, including home-country national saving behaviour, macroeconomic policy, industrial organization, financial policy and taxes (Zimmer and McCauley, 1991, p. 33). Zimmer and McCauley find significant differences in bank cost of capital facing commercial banks in different industrial countries. They find that the increase in the market share of foreign MNBs in the US can be explained by differences in the cost of capital in the MNBs' domestic market. Cost of capital advantages arose from savings and macroeconomic

Capital In Historical Perspective

Capital then originates from the idea of a fund of money that facilitates the time-consuming use of production goods. But is it the fund or the goods, or both, that facilitate production Can it be said that while the capitalists' fund facilitates the use of production goods under social arrangements where such goods are privately owned, it is the production goods and not the fund that are truly productive If so, it seems logical to differentiate between a capital fund, which is just an accident of particular historical social arrangements, and capital proper which refers to the technologically necessary instruments of production. It seems natural from this perspective to think of capital as a factor of production along with the original factors of production labor and land. In modern economics it is thus this physical capital that is now implied when no qualifiers are used. It must be recognized, though, that individual capital goods can accomplish nothing on their own. It is together...

Synopsis Of The Theory

Most of these learned rules that grew to increasingly override and replace innate instincts are specific moral rules such as honesty, truthfulness and contractual fidelity. Other social institutions such as the family, language, law, private property, the market and money also emerged in this manner and played a decisive role in this process of cultural evolution. Many of the more recent rules repealed former prohibitions. Instead of prohibiting certain acts and prescribing others, the rules that gradually developed in the course of cultural evolution came to afford the individual more effective protection against arbitrary violence from third parties and enabled him to create a protected area into which others were not allowed to intrude and within which the individual had the right to apply his knowledge for his own purposes. Hayek cites as examples the toleration of barter trade with members of other groups the recognition of delimited private property, especially in land the...

Rationales for Public Programs

At the same time, there are reasons to believe that, despite the presence of venture capital funds, there still might be a role for public venture capital programs. In this section, I assess these claims. I highlight two As discussed above, venture capitalists specialize in financing these types of firms. They address these information problems through a variety of mechanisms. Many of the studies that document capital-raising problems examine firms during the 1970s and the early 1980s, when the venture capital pool was relatively modest in size. Since the pool of venture capital funds has grown dramatically in recent years (Gompers and Lerner 1998), even if small high-technology firms had numerous value-creating projects that they could not finance in the past, one might argue that it is not clear this problem remains today. While there may have once been a role for government certification, it may not still be there today.

But what I am getting at is What will get you from the concept into the actual position

An event that triggers changes in how the company is perceived by the investment community to something less stellar than it is now. Another thing we monitor very closely is institutional ownership. Microsoft has a 95 percent institutional ownership. Who is going to absorb all of that supply if Fidelity and other benchmarking copycats decide to reduce their holdings When the institutional ownership begins to dwindle, it is a safe bet that the stock will go down under the weight of its own supply.

Your list of stock selection factors can you explain why you consider AOL so extremely overpriced

AOL, which by the way is the third largest holding of Fidelity Magellan, is the blue chip of the Internet world. The bulls argue that the company is growing very quickly in a sector that is the industry of the future, and therefore valuation is practically inconsequential. Well, as a value investor partial to reason, I take issue with that viewpoint. In the long run, there has to be some economic rationale for the price of a stock. The barriers for entry into any ISP Internet business are low, with several thousand service providers in the United States alone. Some of them are even offering the service for free. No matter how generous I make my growth estimates for AOL, and even allowing for a historically high price earnings ratio of 40 to 1,1 still cannot come up with an implied market capitalization greater than 15 to 20 billion. Yet the market currently values AOL at about 160 billion, and it was as high as 200 billion. This figure is higher than the entire ISP Internet business...

What made you decide to make the transition from analyst to money manager

I had done well trading my own account for many years, and I wanted to devote full time to stock picking, which had always been my passion. As a sell-sider, nearly 80 percent of my time was spent on marketing, and the research was often too oriented on maintenance. Another attraction was that, as a portfolio manager, my universe of potential ideas would expand dramatically. Also, although I certainly wasn't underpaid as an analyst, I was well aware of the economic potential implied by the remuneration-for-performance structure of a hedge fund. Finally and I hesitate to say this because I don't want to

Can The Theory Be Falsified

Hayek's theory is indeed falsifiable because he clearly names the institutions that were decisive for the growing prosperity and the increase in the human population and lists each of their characteristics, irrespective of their success in the evolutionary process to date. He also explains why they have endured and proven to be beneficial for the groups that created or adopted them. According to Hayek (1988, pp. 12, 67), the most important institutions that promote prosperity are private property, individual liberty, the market and certain moral rules (especially honesty and contractual fidelity). In the case of the institution of private property, for example, the main issue is that it must be clearly defined and protected by the state (Hayek 1988, pp. 30-7). This ensures that every individual has a certain area in which he can rule alone, Hayek says. As long as the legal rules defining individual liberty are known, abstract and general, apply...

Technocracy and knowledgebased economies

About 'trust-embedded economies' (also see Smets et al. 1999). However, if we dissect contemporary discourses on trust we quickly discover that in many discussions (and certainly in the worlds of business and finance) it refers to an instrumental notion of reliability that has become a core component of our 'high-fidelity' technocratic culture. Here, fidelity simply means a predictable and reliable mechanistic response to an input requirement (Van Loon 2002a).

But insider buying is not exactly a secret In fact it came up in a number of other interviews I did for this book

Over the course of the two times in my career that I looked for a job on Wall Street, I must have interviewed with as many as eighty firms. I was amazed by how many hedge fund managers used charts and sell-side information brokerage research but didn't use insider buying. In fact, I had a lot of managers tell me that using insider buying was stupid he

Technical Matters

The classical economists believed that the factors Land, Labor, and Capital earned the income of Rents, Wages, and Profits (Interest) respectively. The Austrian view is entirely different All productive factors (including land, labor, and capital goods) earn rents, and all durable goods yield interest over time. Consider a piece of land that can be rented for 1,000 annually to sharecroppers. If the capitalized value of the land is 10,000, then these annual rents of 1,000 are, at the same time, an annual interest return of 10 percent on the invested capital funds. (This example is adapted from Irving Fisher.)

Where did you get out

Exactly, and the stock was fully locked up there weren't any shares available to be borrowed . That's when I learned that the short game is very relationship dependent. If there is a scarcity of stock available for borrowing and I'm competing with a large fund manager who does more business with the brokerage firm than I do, guess who's going to get those shares. This occurred back in 1997 we were a lot smaller then. Are you implying that large fund managers will sometimes get together to squeeze the shorts

Why did you leave Atacama

Money management firm to a mutual fund company. Also, both my husband and I wanted to move back to San Francisco. I spoke to a number of hedge funds in the area, but none of them were interested in giving up control of part of their portfolio to me, and I didn't want to go back to working as just an analyst after having been a portfolio manager. With some reluctance, I had dinner with Henry Skiff. It was the said. He had formed a small partnership with about one million dollars. He told me I could grow it into a hedge fund, run it any way I wanted, and get a percent of the fees.

Death the crisis of 2008

The experience of the United State itself provided plenty of evidence against the Efficient Markets Hypothesis. The government-orchestrated rescue of hedge fund LTCM provided a preview of the massive bailouts of 2008 and 2009, undermining some key assumptions of the Efficient Markets Hypothesis in the process. Even more significantly, the boom and bust in the stocks of dotcom companies that promised to generate vast profits from the Internet showed that all the sophistication and complexity of modern financial markets only served to make possible bigger and better bubbles. The debate over the Efficient Markets Hypothesis gave rise to the view that the market is just close enough to perfect efficiency that the returns available from exploiting any inefficiency are equal to the cost of the skill and effort that goes into discovering it. This idea is central to the operations of hedge funds, which seek to discover strategies by which investors willing to take a risk can earn above...

It almost sounds as if he was gambling with the portfolio

Is it legal to price privately held stocks with such broad discretion Yes. In respect to private companies, the general partner is given that discretion in the hedge fund disclosure document. The auditors also bought off on these numbers every year. He would tell them what he thought these companies were worth and why, and they would accept his valuations. They were these twenty-two-year-old auditors just out of college, and he was the hedge fund manager making 20 million a year they weren't about to question him.

Summary And Implications

Over thousands of years and in countries around the world, cities have been concentrations not only of people but also of industrial, commercial, cultural and artistic enterprises. Indeed, it is these enterprises that have drawn people to the cities. Moreover, cities have been in the vanguard of many different civilizations, the places where new ways of doing things are developed and spread out into the provinces and the countrysides. Because so many cities are ports, whether on rivers or harbors, they import

Many Stages The Pure Rate of Interest

Invests in this process ends up with more capital funds than he started with. This excess return is not due to the productivity of the farmland, or of the capital goods such as tractors used on the farm, but instead is due to the fact that present goods are subjectively preferred to future goods.

Can Voucher Privatizations Ever Be Successful

Although the empirical record suggests that voucher privatization is rarely if ever an economically optimal policy, the fact remains that governments typically adopt mass privatization methods only when they feel there is no realistic alternative. Boycko, Shleifer, and Vishny (1994), Nellis (2001), and Bornstein (1999) all conclude that there was no real alternative to mass privatization in transition economies. Therefore, if vouchers must be used, how can mass privatizations be designed to be as successful as possible The empirical record suggests that four steps should be taken. First, and most important, the government should completely divest its holding in state-owned banks, and then find a way to commit itself not to intervene in credit decisions after divestment. In other words, the government must create a believable hard budget constraint for privatized companies. Second, the state should allow, even encourage, foreign investors to participate in the mass privatization...

Monetary Equilibrium Reconciliation

At the same time, the supply of bank liabilities is related to the level of investment. The way that banks add to the money supply is through deposit creation. Faced with excess reserves, banks will induce investors in by lowering their market rates of interest. Banks create loans by adding to the borrower's holdings of bank liabilities. Banks are intermediaries between the savings supplied by liability holders and the investment funds demanded by borrowers. Bank liabilities can be seen as forms of very short term, instantly recallable credit. Holders of bank liabilities are the ultimate lenders, having given up real goods to acquire the money. Those who acquired the goods by spending the bank loan are the ultimate borrowers, having acquired goods and a promise to pay the bank.

Mr Aldrichs Monetary Plan

Aldrich, Chairman of the Board of the Chase National Bank, suggests as a substitute for the plans advanced at the Bretton Woods conference the negotiation of international agreements for the removal of trade barriers and the establishment of a stable dollar-sterling exchange rate. Whatever may be the final verdict upon the merits of his proposal, his analysis of the proposed International Fund and Bank is thoughtful and impressive, and his own positive proposals make it obvious that his viewpoint is far from that of an economic nationalist.

Economies of scope Economies of Scope Concept

Studying economies of scope forces management to consider both direct and indirect benefits associated with individual lines of business. For example, some financial services firms regard checking accounts and money market mutual funds as loss leaders. When one considers just the revenues and costs associated with marketing and offering checking services or running a money market mutual fund, they may just break even or yield only a marginal profit. However, successful firms like Dreyfus, Fidelity, and Merrill Lynch correctly evaluate the profitability of their money market mutual funds within the context of overall operations. These funds are a valuable delivery vehicle for a vast array of financial products and services. By offering money market funds on an attractive basis, financial services companies establish a working relation with an ideal group of prospective customers for stocks, bonds, and other investments. When viewed as a delivery vehicle or marketing device, money...

Costs and Efficiency in UK Banking

Given the lack of consensus in the literature concerning the appropriate production model to be employed for depository institutions (alluded to in Section 4), Drake (2001) proposed an agnostic view of the appropriate specification of inputs and outputs in order to investigate the implications of differing specifications for the analysis of efficiency in UK banking. Model 1 represents a modified form of the intermediation approach which recognizes that banks in recent years have increasingly been generating income from off-balance sheet business and fee income generally. Drake argues that these forms of revenue-generating activities would not be captured by focusing on the value of earning assets on the balance sheet. Hence, the category of 'other income' is included as an output along with two categories of earning assets, loans and liquid assets plus investments. With respect to inputs, capital is proxied by the value of fixed assets while labour is proxied by the total number of...

Conclusion Entrepreneurship In A Globalizing World

The connectionist perspective on entrepreneurship is sharply at odds with how mainstream economists are driven to view the theoretical place of entrepreneurs in the modern world of globalization, a viewpoint that leads them to favor particular policies aimed at fostering it by making entrepreneurial activity more attractive to undertake. From the field perspective, the world is increasingly a place in which competition may come from any quarter, limiting scope for the earning of supernormal returns. The removal of barriers to parallel importing enables entrepreneurs who spot opportunities for arbitrage anywhere in the world to constrain the ability of manufacturers to practice price discrimination between markets. Aided by internet search engines, consumers can choose in an informed manner with unprecedented ease and source their purchases from anywhere on the planet that offers the best deal. The same applies to the allocation of investment funds in a world of electronic share...

Helping Investors to Select Desired Interest Rate Risk

Because many investors want to know how much interest-rate risk they are exposed to, some mutual fund companies try to educate investors about the perils of interest-rate risk, as well as to offer investment alternatives that match their investors' preferences. Vanguard Group, for example, offers eight separate high-grade bond mutual funds. In its prospectus, Vanguard separates the funds by the average maturity of the bonds they hold and demonstrates the effect of interest-rate changes by computing the percentage change in bond value resulting from a 1 increase and decrease in interest rates. Three of the bond funds invest in bonds with average maturities of one to three years, which Vanguard rates as having the lowest interest-rate risk. Three other funds hold bonds with average maturities of five to ten years, which Vanguard rates as having medium interest-rate risk. Two funds hold long-term bonds with maturities of 15 to 30 years, which Vanguard rates as having high interest-rate...

Money And Financial Institutions

Monetary authorities should focus on regular audits and enforcing reserve ratios. State intervention should be reduced by privatising banks, prohibiting the government allocation of credit and subsidising of interest rates to prioritised sectors, and curtailing the use of the commercial banking sector to finance the government debt (World Bank 1989 170-3). In general, the private sector should be used to funnel investment funds to credit worthy individuals while the state is restricted to properly expanding the money supply

The Long Term Capital Management Debacle

Long-Term Capital Management was a hedge fund with a star cast of managers, including 25 PhDs, two Nobel Prize winners in economics (Myron Scholes and Robert Merton), a former vice-chairman of the Federal Reserve System (David Mullins), and one of Wall Streets most successful bond traders (John Meriwether). It made headlines in September 1998 because its near collapse roiled markets and required a private rescue plan organized by the Federal Reserve Bank of New York. The experience of Long-Term Capital demonstrates that hedge funds are far from risk-free, despite their use of market-neutral strategies. Long-Term Capital got into difficulties when it thought that the spread between prices on long-term Treasury bonds and long-term corporate bonds was too high, and bet that this anomaly would disappear and the spread would narrow. In the wake of the collapse of the Russian financial system in August 1998, investors increased their assessment of the riskiness of corporate securities and...

Using Economic Analysis to Predict the Future

Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example, Vanguard carefully explains interest rate risk and offers alternative funds with different interest rate risks. Go to http flagship5.vanguard.com VGApp hnw FundsStocksOverview.

Magadan and the Economic History of Dalstroi in the 1930s 111

As the following in 1936 We congratulate the workers and leadership of the trust Dalstroi upon fulfillment of the program for gold-mining, and send Bolshevik greetings. 14 Berzin had received the highest state honor in the preceding year when the Soviet government awarded him an Order of Lenin in the Kremlin for outstanding service in surpassing target figures for gold production, an accolade also awarded to his leading deputies, Z. A. Almazov and A. N. Pemov.15 Several other subordinates concurrently won citations, all of which were highlighted nationally on the front page of Pravda. The most intriguing citations went to a handful of Dalstroi prisoners, who received early release (dosrochnoe osvobozhdenie) for their part in achieving the lionized results. From the standpoint of central authorities, the future appeared bright with promise for these regional officials at the vanguard of socialist labor. 16

The Continuing Debate

Suppose business expectations are pessimistic, investment is less than aggregate savings and financial markets cannot induce further investment, even though interest rates are rock bottom. National income will fall as recession grips the economy. In such circumstances, Keynesian economic policy is for governments to spend more than they tax. If the government's budget is in deficit then the domestic economy must be receiving the money the government is losing (assuming no outflow of international funds). Private sector investment may be low but net injections will rise if public sector investment compensates to build more roads and hospitals, employ more people and pay them wages. An economy in recession can thus be stimulated if the government makes the injections which the private sector is unwilling to provide. Notice in this example that savings outweigh private investment so therefore the government can finance a budget deficit by borrowing from the financial markets which are...