From Institutional Investor:
Calif. Firm Preps ETF Hedge Fund
May-01-2008 | Source: Alternative Investment NewsHermosa Capital Management is preparing the summer launch of a long/short hedge fund called Hermosa Capital Fund to invest in exchange-traded funds, FINalternatives reports.
The firm will use proprietary analysis and a fund ranking system to choose from the selection of global ETFs It will invest in securities that trade in enough volume to allow for speedy execution of transactions. Positions in securities may be held for very short periods, even as little as a day, said Christopher Harris, a consultant to the fund.
“I traded individual equities and mutual funds so when ETFs hit the market, I was just excited. We’re at about 600 ETFs now, which is more than enough, and we’re seeing new funds from India and other country-specific ETFs, so we’re able to capture a lot of different markets at the drop of a dime,” said Harris.
The strategy will employ a proprietary system that will rank about 300 ETFs based on relative strength, momentum and total return. The firm will then choose the top three to 10 to invest in. The existing strategy is exposed to the U.S., China and South Africa.
According to Investment Company Institute, there are about 613 ETFs with a collective AUM of $572 billion.
I wonder what the fees for this strategy will be…
Hedge Fund ETFs: Under The Radar Wall Street Con
The other day, I went looking through my favorite market stats to see if any remaining profits could be pounced upon. Typically, profit possibilities can be identified quickly on NYSE lists of the largest dollar and percent gainers.
Alarmingly, 75% of the largest percent gainers were ETFs, and many of those operate using the same strategies as classic hedge funds— most owned no common stock at all!
What is a hedge fund, and just what does it try to accomplish? I think the key legal element is that they don’t say how they intend to get the job done.
Initially, hedging was used as a risk mollifier in the securities markets in the same way as insurance is used for protection against disasters impacting life, health, and personal property. Taking a short position on an owned security, for example, protects an investor’s profit if the company’s market price plunges.
The new definition of hedge fund speaks of an aggressively managed entity that uses leverage, long, short, options, futures, and derivative positions with the goal of generating high returns. Risk reduction is no longer the objective.
Hedge funds have never been regulated like their open-end mutual fund cousins— the rationale being that they cater to a wealthy and sophisticated clientele. In fact, the law requires that participants in hedge funds jump over income, net worth, and investment high-hurdles before being eligible to participate.
Investopedia refers to them as mutual funds for the super rich, but the only similarities to the plain vanilla equity mutual fund are the pooling of participants’ money and professional management. During the past decade, a series of ill advised and shortsighted rules changes gave hedge fund managers destructive powers that exacerbated the financial crisis that will mourn its second anniversary this summer.
But regulating the hedge fund is clearly a too late closing of a barn door encrusted with diamonds (no pun intended). A few years ago, the masters of the universe rediscovered, redefined, and complicated the world of closed end mutual funds by creating many different forms of passively managed index/hedge funds.
As innocent as these funds may appear, they too have altered the investment landscape. Speculators (not investors) place their bets on the rise or fall of the index. These bets artificially impact the market price of securities because many (if not all) of the funds actually own the securities they are tracking.
Additionally, many individual stocks fall into several indices, and most of the major ETF marketing companies sell similar index funds. Didn’t we just go through this with mortgage-backed securities? Aren’t these funds artificially taking common stock pricing further and further away from the fundamentals of the companies themselves?
Apparently, the SEC has not taken the trouble to look inside the thousands of boutique ETFs that by now must outnumber the securities they are tracking.
Wall Street wants all CEFs (index, hedge, bond, equity, real estate, whatever) to be regulated and reported upon as though they were simply common stocks. As a whole, they aren’t even close. In fact, there are more of these derivatives traded on the NYSE than common stocks and preferred stocks combined.
And the real crime is this: investors as naive as the wet-diapered E-Trade spokesbaby can push a button and buy operational hedge funds more bizarre and sophisticated than any ever imagined buy the rich and famous.
If an ETF harbors a hedge fund, but doesn’t call it a hedge fund, is it really not a hedge fund?
Shouldn’t the regulators be smart enough (and brave enough) to put an end to these legal-in-name-only frauds? Should your mother’s IRA be speculating in puts on Netherlands Tulip Bulb futures? How about 200% of the inverse of the Financial Select Sector Index?
So long as we tolerate Wall Street attorneys circumventing the intent of our securities laws, and so long as we reward regulators for their blind worship of the letter of these laws, we will have this kind of manipulation.
Index ETFs (and the no doubt about it hedge fund casinos they front) need a league of their own, located in Vegas, AC, or Uncasville. They demand a new rulebook that recognizes content and strategy— not trading form.
Whatever happened to stocks and bonds?
Steve Selengut
The Brainwashing of the American Investor
Professional Investment Management Since 1979
By: sanserve on April 13, 2009
at 10:05 am