SLCG's Own Dr. Tim Dulaney to Join the SEC
(Feb 2014)
I am sad to report that one of SLCG Blog's commentators, Dr. Tim Dulaney, will be leaving us for an exciting opportunity at the Division of Investment Management at the Securities and Exchange Commission. While we will greatly miss his skills and camaraderie, we are glad that he will not be going far.
Dr. Dulaney has made enormous contributions to our research and advocacy work over the past two and a half years. He has co-authored eleven working papers and peer-reviewed publications (!),...
Credit Default Swaps on Steroids: UBS's Willow Fund
(Jan 2014)
We previously published a working paper on how investors in Oppenheimer's Champion Income Fund lost 80% in 2008 when peer group funds lost about 25%. Our Champion Income Fund paper is available on our website. Oppenheimer had increased Champion Income Fund's exposure to CMBS through credit default swaps and total return swaps in 2007 and 2008. Figure 1 reproduces a figure from our 2010 paper which demonstrates that the leverage Oppenheimer took on through the swaps fully explained the...
SEC Litigation Releases: Week in Review - January 17th, 2014
(Jan 2014)
SEC Charges Former Senior Executives of Public Company Subsidiary with Falsifying Financial Records and Circumventing Internal Controls
January 15, 2014, (Litigation Release No. 22906)
This week, the SEC announced charges against Christopher Hohol and Brian Poshak, "formerly the senior vice president for operations and the controller, respectively, of Veolia Special Services, a fourth-tier United States subsidiary of Veolia Environnement S.A." According to the SEC, the defendants falsified...
SEC Examiniation Priorities 2014
(Jan 2014)
The Securities and Exchange Commission (SEC) senior staff recently announced their 2014 examination priorities . The national examination program will be focusing on fraud detection and prevention, corporate governance, and registrants that serve as both a broker-dealer and investment adviser.
SEC staff also plans to undertake initiatives that examine the rollover of retirement vehicles during employment transitions or near retirement. In particular, the staff is concerned about misleading...
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...
