Comments on: Three Funds Someone Should Start

By: matt

matt — Fri, 05 Mar 2010 09:10:52 +0000

You are right, perfect for mgmt fee based vehicle, but I'll definitely take the over (if you take me up on that, I'll assume you have some info I don't have . Would be nice as a structured product from a bank, but haven't even found it in that format. I don't think 10% implies enough convexity to make it a really juicy hedge, though, it would be much more interesting to see 20-50% bleed per year and you would just re-up to your desired allocation every 6-12 months. Agree we're even less likely to see an ETN like that, but seems to me a more efficient hedge that way.

By: matt

matt — Fri, 05 Mar 2010 03:10:52 +0000

By: piefarmer

piefarmer — Tue, 02 Mar 2010 15:03:12 +0000

On the equity side, PIMCO has Stock Plus funds for long or short the SP500. They hold short bonds, then buy long options to bet on the SP500 rising or falling. Exp ratios 64bps to 105 bps.

By: CMRCPA

CMRCPA — Mon, 01 Mar 2010 23:57:46 +0000

Hi Meb,

I would be concerned about implementation of this product. How would we know that it works before a black swan actually appears? For example, when the VIX options first came out a lot of folks purchased that new insurance policy. Only later did they find out that the further dated options did not track the volatility of the day. Even the near dated options tracked poorly when they still had some time to expiration. I think whoever puts out this product (and if it works as advertised, yes, it would be a great idea) needs to have a pretty strong reputation in the field and have some pretty convincing backtests with hedging instruments that existed at the time of the backtest.

By: Johnni

Johnni — Sat, 27 Feb 2010 11:39:16 +0000

Mebane, would any of the Volatility ETFs not do much the same? Thing is any of the advisors client portfolios, will have different factor exposure, so it would properly be better for him to customize hedging strategies through derivatives.

By: David_Merkel

David_Merkel — Sat, 27 Feb 2010 01:23:37 +0000

Mebane, love your stuff. This opposite of this is being done in bondland by Pimco. They have been doing it for over 20 years, constantly selling out of the money volatility, which helps to account for the high long term yields they have produced. Here's my summary:

http://alephblog.com/2007/06/13/pimco-in-theory...

As for a fund that buys such options on a rolling basis, when interest rates were higher, there were funds that bought options with the interest from t-bills. Some had a lockup, and were able to buy longer with more proceeds, immunizing the principal with a zero coupon bond. Then there are EIAs (Equity indexed annuities) -- that's the strategy that they pursue.

Just a few thoughts.

By: Your friend DP

Your friend DP — Fri, 26 Feb 2010 20:23:59 +0000

Why would you need need insurance when the world is full of great FAs that work for Edward Jones and have no experience managing a kool aid stand let along other peoples money. If you're a good enough sales person, you can sell water to a fish.

By: Jake

Jake — Fri, 26 Feb 2010 17:37:30 +0000

So lets assume it returns 200% in systemic crashes and loses 10% in stable periods (there are private vehicle offerings in this space). Then the most important thing to do in the first place is sizing (how much to buy) and then a regular basis is re-sizing.

The question would be whether retail investors are sophisticated enough to re-size every 3-6-12 months. After a "normal" year, the investor would need to buy 10% more to maintain whatever exposure they had all else equal. The issue is nothing is ever all else equal. In that environment, their other assets probably gained in value, thus they need to buy more than 10%.

The difficulty is ampligied when the investor needs to resize the other direction (i.e. the markets crash and it doubles in value), which leaves the investor over-hedged.

Ask any sophisticated investor / institution about hedging. The hard part isn't getting the mapping right. It's when to hold on.

By: WorldBeta

WorldBeta — Fri, 26 Feb 2010 16:36:24 +0000

Not publicly.

By: WorldBeta

WorldBeta — Fri, 26 Feb 2010 16:36:16 +0000

Why can't it be a stand alone fund that targets losing 10% a year during stable, appreciating markets? Structuring the fund as an ETN gets around the tax issues.