Fiery Finance

Drop the mutual funds and stick with passive managment!

theguywithmagicTAcalculator — Tue, 02 Feb 2010 23:32:55 +0000

A study by one of the leading finance journals in the globe suggests a lack of skilled fund managers. The 2010 study states that over the period between 1989-2006 number of funds that generated zero-alpha (netted of expense) was 75.4% of the total population tested, and guess what, those unskilled-funds managers, generating less than zero-alpha, made almost 24%. those with ” hot hands “, generating positive alpha constantly, made a mere 0.6% of the population.

what this study essentially says that nearly all of actively managed open-ended mutual funds, across the studied period, have a 0=>alpha. which in turns explains the increased popularity of passively traded funds or ETFs.

Whats interesting though it wasn’t always like this, as the paper shows, the number of funds with managers with “stock picking” abilities deteriorated from 14.4% in beginnings of 1990s to 0.4%. and whats more astounding is funds generating negative alpha increased from 9.2% to 24%.

while there was no shortage of funds, as numbers of actively managed mutual funds increased from around 400 to 2,076 by 2006. the average alpha diminishing to -0.97%.

so yeah, good luck with that fund.

Equities Arbitrage (ADR/GDR)

theguywithmagicTAcalculator — Thu, 12 Nov 2009 19:51:05 +0000

Arbitrage usually defined as a non-risk bearing action employed by an investor in order to gain instant profit out of a specific transaction. normally equities (securities) are bought at a lower price and sold at higher price in other market by utilizing what’s called ADR/GDR arbitrage. where ADR stands for American Depositary receipt while GDR stands for Global depositary receipt.

Even though arbitrage is considered to be a risk-less business that is if you could find an opportunity, in real world markets the definition is stretched as most aggressive investors/funds uses a strategy involving directional position on spreads, as the investor anticipates the spread in price will either narrow or widen according to pre-set assumptions. if the spreads widens contrary to what is anticipated then losses are incurred on the arbitrage positions. Therefore, risk-free positions on arbitrage are virtually non-existent as network-linked markets and trading desks managed by cash-rich investment banks will eliminate these opportunities before its evident to even to the most accomplished investor.

Costs are in terms of transactional cost (including speed of execution), foreign brokerage, currency conversion, and funds fee (if there is one). An investor willing to engage in arbitrage should examine the viability of the trading opportunity, its typical to employ Monte Carlo simulations in order to assess the efficiency of a transaction.

There are many reasons as to why arbitrage exists, to name a few liquidity, different risk-reward characteristics in certain ADRs, laws hindering the movement of capital. Opportunity may arise in any country however India in particular is a good example, as well as Southeast Asia countries. substantial spreads have been created due to different time-zone effects.

The first one

theguywithmagicTAcalculator — Wed, 11 Nov 2009 23:21:14 +0000

hello guys

well let me state at first that I have a tendency to forget about things, i hope that i won’t be forgeting about this blog anytime soon. I created this blog for the sole purpose of inducing me to read and examine certain topics in finance specially related to investments strategies. Being a guy with a mental capacity of a 4 year old, this means that neither me or what I write about are credible, and by no means an an authoritative source. its a mere series experiment that i wish to conduct to my best ability, and wish gain some fresh prospective from other people’s comments on the subjects.