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Posted by Dave C. on August 15, 2008, 8:16 am
We have clearly heard about how some of the financial institutions have been
hit by the mortgage issues, but not much has been reported if Fidelity has
suffered any damage.
I would like to hear opinions on this. Maybe there is a mortgage arm of
Fidelity I am not aware of.
Thanks,
Dave C.
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Posted by Elle on August 17, 2008, 11:21 am
> not much has been reported if Fidelity has suffered any
> damage.
Fidelity Investments is privately held, so information on
its financial health is not going to be at all well
publicized. Importantly, Fidelity does not run a banking
division. This contrasts with companies like Morgan Stanley,
Goldman Sachs and Merrill Lynch, all of which are publicly
traded and do run banks (underwriting new businesses, etc.
for one). They also sold subprime CMOs.
It crossed my mind to wonder whether perhaps Fidelity had
hedge funds. I found this fascinating 2004 comment by
Fidelity on the subject:
"Fidelity Investments has no plans to enter the hedge fund
retail marketing business, such disclosure was made by
Robert Reynolds, the vice chairman and investment officer
for Fidelity. According to Mr. Reynolds, running mutual
funds and hedge funds under one roof may create a conflict
of interest he explained. Reynolds said, "We have elected
not to provide those types of funds, and we don't see that
changing in the near future." The article goes onto report
that a number of Fidelity managers have defected to the
hedge fund industry.
http://www.hedgeco.net/fidelity-investments.htm (dated 2004
using other sites that quote the same). More recent articles
say that many who defectees are now returning to Fidelity.
Starting this month, I see that Fidelity started offering
FOTTX, which one article calls "Hedge Fund Lite." It shorts
stocks (but overwhelmingly large and mega cap ones) from
time to time. See
http://www.mcall.com/business/local/all-jaffee0422.6369548apr22,0,5034756.column
Fidelity, like all brokerages, offers investors mutual funds
focused on CDOs and mortgage backed securities, etc. But
none of Fidelity's own funds are so focused. Fidelity's
operations are nothing like, say, Goldman Sachs, which
pushed its own subprime mortgage based funds while
simultaneously, and unknown to investors, shorting its own
funds. If Fidelity suffers any damage, I would expect it to
be only by way of reduced trading while its customers take a
deep breath.
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Posted by rick++ on August 17, 2008, 3:11 pm
Fidelity just started a true hedge fund called the 130/30 fund.
It permits 30% shorts. It has one of the best results YTD.
I distinguish true hedging - holding contrary positions -
from so-called hedge funds. The latter are nearly-unregulated
"cowboy funds" limited to 99 or fewer rich investors.
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Posted by Elle on August 17, 2008, 5:43 pm
> Fidelity just started a true hedge fund called the 130/30
> fund.
The fund I mentioned earlier, FOTTX, is called Fidelity's
"130/30 Large Cap fund." It is not held privately, so I do
not think it meets the definition of a "hedge fund."
> It permits 30% shorts. It has one of the best results
> YTD.
YTD performance is a criterion I never use to buy stocks or
funds. It's way too short a time period.
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Posted by on August 18, 2008, 12:45 pm
> > Fidelity just started a true hedge fund called the 130/30
> > fund.
>
> The fund I mentioned earlier, FOTTX, is called Fidelity's
> "130/30 Large Cap fund." It is not held privately, so I do
> not think it meets the definition of a "hedge fund."
I think Rick made that clear when he pointed out that it's
not a "hedge fund" but rather "a fund which actually hedges".
That said, 130/30 is a category of mutual fund which has
become one of the current new hot things out there. If
you go to Morningstar, and put "130" into the quote box,
it'll come up with a list of 50 "130/30" funds (well, many
have multiple share classes, but narrowing it down from
there, it's 11 new funds from a variety of companies all
doing a "130/30" strategy.
However, I don't think I agree with Rick, either, that
it's really a "fund which hedges". These funds typically
have net equity exposure of 90% or so. (the 130 long
minus the 30 short, with some room for cash and such).
I'd call them closer to true hedging assets if they were
much closer to 0 net equity exposure - true and full (or
closer to full) hedging - and thus yielding highly UNcorrelated
results.
These 130/30 funds are going to have results very highly
correlated with the broader equity market, and generally
to the large-cap market (since that seems to be where
most of them play). If anything, I'd expect them to behave
more like slightly amplified S&P 500 funds.
The useful characteristic of a real hedge fund (whether
"hedge fund" in the current popular definition thereof
or not) is that it doesn't behave that way.
I don't think any of the currently available 130/30
funds has been out there long enough, though, to really
measure their correlation the the index very well. Not
yet. Give them a couple of years, I suppose.
For what it's worth, there have been funds which engage
in "pairs trading" around for years, though it's a very
difficult task (generally one matches a long position
with a short position, often with a pair of companies
in the same business - the bet is not on that industry,
but rather just that one of the two will outperform the
other one). There are also fund which are allowed to
sell short and/or borrow cash to lever up their returns.
That all said, if you are really looking for uncorrelated
assets, 130/30 funds shouldn't be expected to fit the
bill. If you Google for "long-short funds" you'll find
lots more about "absolute return" "market-neutral" and
"arbitrage" funds. Some of them have done quite well
over the longer run - passable returns with very low
volatility.
Here's a recent Morningstar article on long-short
funds:
http://news.morningstar.com/articlenet/article.aspx?id=247853
(if it doesn't come up, just search for "long-short" on
their front page)
> > It permits 30% shorts. It has one of the best results
> > YTD.
>
> YTD performance is a criterion I never use to buy stocks or
> funds. It's way too short a time period.
Very good advice!
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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