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Posted by Tad Borek on August 18, 2008, 1:55 pm
BreadWithSpam@fractious.net wrote:
> That said, 130/30 is a category of mutual fund which has
> become one of the current new hot things out there.
AKA the latest in the Steady Stream of BS Churned Out by Wall Street!
Not specific to Fidelity's fund, but a 130/30 strategy seems less
appealing if presented this way:
1. put $1000 into an account
2. borrow $300 and pay interest on it
3. buy $1300 of a broad-market index fund
4. sell short $300 worth of a broad-market index fund
5. pay someone a management fee to do all of the above
Obviously nobody would do that, it's a recipe for siphoning money out of
an account, vs. just holding $1k of the index fund. But to buy into a
130/30 strategy one needs to believe in active management (in this
context, stock-picking) more so than in a long-only fund - that the
manager is doing better than average (the market) with both the longs
and the shorts.
Yet only a minority of long-only actively managed mutual fund managers
"beat the market" as it is. A 130/30 adds the costs of leverage, and the
difficulties of picking the short side. So even if the strategy has
merit conceptually, there's still the "manager selection problem." I
don't know how to identify, in advance, someone who is good at
consistently picking both stocks that are going to go up, as well as
those that are going to go down. Shorting is a difficult strategy to
implement, the example I keep in mind is that Soros got taken to the
cleaners during the dot-com bubble. And the Keynes maxim, "the market
can remain irrational longer than you can remain solvent."
-Tad
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Posted by Elle on August 18, 2008, 5:14 pm
Re FOTTX, Fidelity's large cap 130/30 fund
> it's not a "hedge fund" but rather
> "a fund which actually hedges".
I prefer to be emphatic about distinguishing between the
formerly very popular version of hedge fund (privately
owned), where the managers did not have to publicly disclose
their investments, and generally one had to be worth over a
million bucks to buy into it, and the newer 130/30 bona fide
mutual funds, which do have to disclose their investments
and which Joe and Jane Average can far more easily buy.
I thought the wikipedia explanation of the 130/30 strategy
under "Portable alpha" was interesting.
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to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
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