Posts made in January, 2010
Hedge Fund Gating
A hedge fund can decide to suspend the redemption rights of investors, usually whenever it feels it is necessary, which means you won’t be able to get your money out until a later date. The hedge fund would be considered to be “gated” at this point. Why would they do this? It is a provision in the offering memorandum that investors agree to (although let’s face it, not everyone reads the whole offering memorandum so it comes as a surprise if enacted). It is actually designed to protect the fund. If a hedge fund invests in illiquid securities and investors suddenly want their money back en masse, the fund may not be able to sell the assets it holds...
Read MoreA Lap Of The Blogs
If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also sometimes include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. NOTE: you have to visit the actual website to see the embedded video – it...
Read MoreSevering The Link Between Price And Weight Part III
Continuing from Part I and Part II… Actually, tonight I`m going to share some thoughts that struck me in the shower this morning when I was thinking about inverse cap-weighting a slice of the market (as reader Jordan had suggested to avoid market capacity constraints). Another reason this won`t work in practice is that you are foregoing the participation in the growth of companies since your exposure to companies declines as they become more highly valued by the market. Again, I`m going to reiterate that we are operating with the assumption that over the long term, market prices are efficient enough that taken en masse, a rising total market capitalization...
Read MoreSevering The Link Between Price and Weight Part II
In the first part of this series we discussed the impracticality of inverse cap weighting (also note Michael James’ comments at the bottom of that post.) In this part we will look at what needs to be done to sever the link between price and weight so as to avoid overweighting overvalued stocks and underweighting undervalued stocks. Not intending to be patronizing: to sever the link between price and weight you must weight stocks based on something not directly related to price. The question then, is to figure out what metric to use. Many people use stock market indices as long term proxies for measuring the growth of an economy. If that is a loose assumption we can...
Read MoreSevering The Link Between Price and Weight Part I
In a recent post about market-cap weighted fixed income indices, it was noted by reader Xenko that one way to overcome overweighting overvalued companies and underweighting undervalued companies (counter to what a rational investor would desire) could be to inversely weight constituents of an index. While the original post was about fixed income indices, I’m assuming the thought was directed at equity indices so I will speak directly to that (there is an extra step with respect to fixed income indices that we’ll go over some other time). Here is the problem with that suggestion: if you assigned more weight to a company based on its inverse cap-weighted rank...
Read MoreWarren Buffett Exists Because He Has To Exist?
People point to Warren Buffett as proof for how and why active stock picking works, but they don’t understand that it might just be that he has to exist. Click here for a little primer on Warren Buffet if you are not familiar with him. The argument here is that his performance is nothing more than a rare, but statistically explainable, occurrence. In his article “Beware of the 5 sigma“, Matt Koppenheffer explains that 95% of all US males are between 5’5″ and 6’2″. 95% represents two standard deviations, or sigmas. He goes on to point out that Manute Bol at 7’6″ is a 10 sigma event. Clearly he exists, and we all know...
Read MoreHealth Care Bill in Trouble?
Recently, there was a surprise Republican win in the senate election for the state of Massachusetts by Scott Brown. This victory means that the filibuster-proof senate the Democrats enjoyed is no-longer. Until Brown’s win, the Democrats had enough votes to prevent Republican lawmakers from proposing endless amendments (many of which would be trivial) in an order to stall the bill in perpetuity – this is known as a “filibuster”. Now the Republicans can essentially do this. This doesn’t bode well for the bill being passed – at least in its current state. Brown visited Capitol Hill recently to much pomp by his Republican receivers. It...
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