2 words: Renaissance Technologies http://en.wikipedia.org/wiki/Renaissance_Technologies
the article addresses hedge funds near the end.
The best investment advice you'll never get
41–50 of 94 posts
Re: The best investment advice you'll never get
#42Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?
I have several concerns with index fund/ETF investing: 1. How much of the underlying stocks, that make up the Index, are really owned by the Index fund/ETF? I doubt that such funds/ETF actually own 100% of the required underlying stocks, may be using some sort of option/hedge strategy. 2. In what scenario, not owning the actual underlying stocks can be detrimental to index fund/ETF? I am looking for what may cause fa…
1. An index is generally creared to the target mwarket.
Re: The best investment advice you'll never get
#43Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?
I have several concerns with index fund/ETF investing: 1. How much of the underlying stocks, that make up the Index, are really owned by the Index fund/ETF? I doubt that such funds/ETF actually own 100% of the required underlying stocks, may be using some sort of option/hedge strategy. 2. In what scenario, not owning the actual underlying stocks can be detrimental to index fund/ETF? I am looking for what may cause fa…
The problem is that "ETF" is actually quite a broad term. As far as I can tell, many ETF's do run a sort of "fractional reserve" ratio. There was an article here not long ago wringing its hands over that danger which I can't find right now.
The answer to 2 I think depends on how dividends are handled. Obviously if you hold the shares yourself, you control what happens to the dividends, and are free to take them or reinvest them as you wish.
For 3, it depends on the ratio of index trackers to managed funds in the market, but yes, this can have a noticeable effect. A share price always dips when the it's removed from one of the larger indices; you can see an example here: http://uk.finance.yahoo.com/q/bc?s=TATE.L&t=2y&l=on&... - they were removed from the FTSE100 in March 2009.
Re: The best investment advice you'll never get
#44Just a question that popped into my head: what would happen if everyone followed a passive strategy, ie, no one was active? Isn't some sort of active strategy required, somewhere, for funds to be directed at all? Though, I do think on average fund managers probably don't actually make anything like useful predictions. But perhaps we do need someone, somewhere, looking for good investment. My guess is that there is a…
There will always be market participants with vested interest in specific shares, and by definition they are following an active strategy by associating with that company. It follows that they will have a vested interest in hedging against dangers that might adversely affect that company.
Re: The best investment advice you'll never get
#45Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?
This has crossed my mind a lot of times and I think the comment is right - market capitalization of index cannot increase to infinity. There is a finite number of companies that the Index is comprised of and there has got to be a theoretical upper limit to that. Moreover, the investment psychology also comes into play here. The growth rate of index may slow down as it becomes large because investors always compare to…
So long as we keep making more humans the index can keep growing.
Our current culture and economy is based on growth. If it were ever to stop, it would be a catastrophe worse than any Malthusian catastrophe.
It's a good thing the planet is so big. (And despite nay-sayers there is actually plenty of space and resources left.)
Re: The best investment advice you'll never get
#46Earlier quoted context omitted.
Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
The argument against market timing I've always liked comes from Malkiel's Random Walk : > During the decade of the 1980s, the Standard & Poor's 500 Index provided a very handsome total return (including dividends and capital changes) of 17.6 percent. But an investor who happened to be out of the market and missed just the ten best days of the decade—out of a total of 2,528 trading days—was up only 12.6 percent. [...]…
Why is it that no one ever does the same analysis for the 10 worst days?
Re: The best investment advice you'll never get
#47Index funds seem to me to work by reducing churn - the percentage of your stock that is sold and bought each year - because every time you sell then buy you lose a lot of money. I am not yet convinced you have to follow an index. If you had a fund that did not sell anything and bought a random stock from an index as funds came in would this beat an index fund?
Think of the index fund as reducing the risk of depending on any one stock for your gains. I don't know what the distribution of gains is like on an index fund but an answer to your question would likely come from an examination of one.
My theoretical fund would have a wide range of stocks. It does not seem to be related to spreading gains or risks.
I have not seen any comparative table of stock churn rates for different funds, but my guess is that index funds do well because they reduce the sell-buy transaction costs, partly by eliminating the cost of human stock pickers, but primarily by reducing the percentage of stocks in the fund that are sold then bought every year. Maybe this is wrong?
My understanding is that an index fund sells and buys stocks to balance the proportions held in the fund as the market capitalisation of the companies changes inside the index. This imposes an apparently unnecessary cost on the fund. If we removed this cost by not selling and buying stocks to keep it equal to the index would the fund become more profitable? I am considering it to be a fund where people invest incrementally over a long period so there would be constant random aquisition of new stocks from the index.
Maybe that doesn't make sense for some reason.
Re: The best investment advice you'll never get
#48Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?
I have several concerns with index fund/ETF investing: 1. How much of the underlying stocks, that make up the Index, are really owned by the Index fund/ETF? I doubt that such funds/ETF actually own 100% of the required underlying stocks, may be using some sort of option/hedge strategy. 2. In what scenario, not owning the actual underlying stocks can be detrimental to index fund/ETF? I am looking for what may cause fa…
For European ETF:
1.) Depends on the ETF. There is
a) Full Replication. All stocks are 1 to 1 in the ETF.
b) Swap based. EU swap ETFs can have up to 10% (but not more) in swap (what you mean by option/hedge), the rest is stocks. Oftentimes ETF issuers have an insurance on those swaps. If the swap counterparty goes bankrupt you loose that 10%.
c) optimized sampling. You have different stocks (or not all of that index) in your ETF. The idea is to find stocks that corelate closely to those in the index.
2.) By buying the ETF you "own" the stocks. ETF are regulated like mutual funds (at least in EU).
3.) ETF are only a small fraction of the worldwide trade. But obviously if your company gets into a popular index (s&p 500) you can be quite happy.
4.) If everybody would only invest in indices, the market won't play anymore and it would be smarter to buy individual stocks again. This is the index investing paradox. But very unlikely to happen.
Re: The best investment advice you'll never get
#49Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?
Out from my crystal ball :
Financial markets can't beat the real economy forever. As a bet on the future growth, they must return to reality from time to time. Furthermore, as growth as we've known it will most probably soon end forever (or for the long term at least), financial markets are on for some future "correction" of humongous proportions when the sovereign debts will be wiped out by inflation.
Re: The best investment advice you'll never get
#50It should be mentioned that this article is from December 2006, when index funds were less widely adopted than they are today.
???
Index funds were as widely adopted as you could ask for back in 1996 when I first started investing in them. And it was common knowledge even then that the S&P 500 tended to outperform 70%+ of managed mutual funds.
If that's the message this article is trying to convey, it certainly has the wrong title.