SPIVA Scorecard: Persistent Lack of Persistence
(Dec 2013)
Earlier this week, S&P Dow Jones Indices released their semiannual SPIVA Persistence Scorecard, which assesses how consistent top performingactively managed US equity mutual funds have been. This is the third SPIVA release since our blog has been in existence and each time we bring attention to their work. Once again, their results suggest that mutual fund managers only rarely outperform for long.
This year the study found that roughly 7% of funds that were in the top 25% of actively managed...
SEC Litigation Releases: Week in Review - December 6th, 2013
(Dec 2013)
SEC Obtains Final Judgment Against Massachusetts-Based Broker and Investment Adviser
December 5, 2013, (Litigation Release No. 22885)
Final judgments were entered against Arnett L. Waters and two entities he controlled, "broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC," for their alleged involvement in the "fraudulent sales of fictitious investment-related partnerships." The final judgment enjoins the defendants from future violations of the securities laws...
Brokers Steal from Elderly Widow
(Dec 2013)
In our day-to-day work, we often come across brokers willing to ruin the lives of the undereducated or underprepared in order to make a quick buck. We thought we'd highlight a particularly egregious example of this from a recent Financial Industry Regulatory Authority (FINRA) press release.
According to the release, Fernando L. Arevalo and Jimmy E. Caballero encouraged an "elderly widow with diminished mental capacity" to sell two annuities for approximately $300,000 and then moved the funds...
Monte Carlo Simulation, Explained
(Nov 2013)
Valuing products with exotic derivatives can be difficult since these products typically have complex payoff formulas. One of the most flexible methods for valuing such products is called Monte Carlo simulation. At SLCG, we use Monte Carlo simulation in a lot of our work, so we thought it would be helpful to explain a bit about it and show how it can be used to estimate the future returns of an asset.
The basic idea behind Monte Carlo simulation is to determine the statistical properties...
Variable Annuity Fees Linked to the VIX -- Part II
(Nov 2013)
In our last post, we discussed a whitepaper that proposed linking the fees in a variable annuity to the CBOE Volatility Index (VIX). That paper ran a simple backtest of a variable annuity fee tied to the VIX over the period from 1990-2012, assuming certain parameters, and then compared the result to a fixed fee annuity over the same period. We have replicated their approach between January 1990 and January 2013 and found that not only are the fees and ending account values comparable, but so...
Variable Annuity Fees Linked to the VIX -- Part I
(Nov 2013)
We've discussed the CBOE Volatility Index -- known as the VIX-- many times before. Essentially, the VIX is a very complex calculation of the expected future variance of the S&P 500 (see the full calculation methodology), and is popularly known as the 'investor fear gauge'. The VIX is not a tradeable asset, but there are VIX options and futures contracts, and those contracts serve as the basis for several VIX-related exchange-traded products (TVIX, XIV, VXXto name a few). The VIX is very...
How Does VolDex Stack Up to the VIX?
(Nov 2013)
We've talked a lot about the idea of using volatility to hedge equity exposure. The basic finding, from our research work and that of others, is that the CBOE Volatility Index (VIX) hedges the S&P 500 fairly well. Unfortunately, the VIX is not investable, but is a complicated calculation based on a large strip of options contracts -- i.e., contracts of varying moneyness. Proxies for the VIX, such as rolling VIX futures strategies, are much worse hedges and have a number of problems that make...
Study Finds that the Average PE Investor Just Breaks Even
(Nov 2013)
Brendan Conway over at Barron's pointed out an interesting new study from the National Bureau of Economic Research entitled: Valuing Private Equity. Private Equity (PE) investments -- typically called limited partnerships (LPs) -- are long-term, illiquid securities representing (perhaps not surprisingly) an equity interest in a private company. Investors are typically referred to as limited partners. The study notes that while private equity returns tend to be high, "it remains controversial...
'Tailored' Exchange Traded Funds
(Nov 2013)
Issuers of new exchange traded funds (ETFs) have a problem: how to attract enough investment to keep the fund alive. ETFs have a relatively high turnover rate, and many of the funds that fail simply never gained significant assets under management. Also, if the fund is not traded frequently, it is likely to have a wide bid-ask spread, further reducing investor interest.
One solution that a few ETF issuers have recently adopted involves building ETFs with a particular customer in mind. Back in...
Conflicts of Interest in TIC Investments
(Oct 2013)
We have been discussing the value of TICs from a financial standpoint, but like most private placement investments, there are many other factors to consider than just the numbers. TICs have a wide array of problematic features that retail investors might not think to look for.
For example, most TICs require unanimous consent of all investors for major decisions regarding refinancing or selling the property. A TIC can be sold to up to 35 investors, making unanimous consent extremely difficult....
