Tuesday, August 30, 2005

True Cost of Active Management by Mutual Funds

Already highlighted by Finance Professor, but important anyway so I repeat.

SSRN-Measuring the True Cost of Active Management by Mutual Funds by Ross Miller: "In particular, funds engaging in closet or shadow indexing charge their investors for active management while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have over 90% of the variance in its returns explained by its benchmark index."

Monday, August 22, 2005

House prices through the ages

Lots of stories about house prices as usual.  The New York Times as a very good item about Shiller’s latest warning on house prices.  Be Warned: Mr. Bubble's Worried Again - New York Times  The big interest here is that he has a new series of US house prices that takes an index of prices of one set of houses through the last 400 years.  The figures show that prices are mean-reverting.  Excessive price gains lead to new developments in new areas.  However, the last several years have been an exception that shows bubble-like qualities.  Shiller’s work is based on an unpublished paper by Professor Piet Eichholtz of the University of Amsterdam who recorded house prices along the Herengracht from 1628 to 1973. More in this article from Australia -   Don't bet on your house.  The graph of Us house prices produced by Shiller is here US house prices.

Friday, August 19, 2005

Credit derivatives

The Economist has another moan about credit derivatives.

Economist.com | Articles by Subject | Credit derivatives: "Of course, things can go wrong. It is possible that the pricing of ever more complicated instruments might sometimes be too much even for the ultra-brainy lot who do it, with expensive results. Tranched instruments have no clear market price, so they have to be valued with complex models. Working out whether a default in a portfolio is likely to be an isolated event, or is a harbinger of more to come, is especially tricky, not least because data on credit defaults are relatively sparse. "

The Oxbridge view of the corporation

The Oxbridge view of the corporation is a person standing on a street corner selling a television that does not work. However, this is a pretty poor version of the modern firm.  Though the immediate profits are fairly high, the long term outlook is very poor.  The person cannot stand on the same street corner tomorrow.  The ‘customer’ with the defective television will return for repayment.  This means that costs rise with increased sales.  The person selling the dud televisions has to keep running to more obscure and less optimal places.  

Isn’t a corporation more like the corner shop?  The initial investment that has taken place means that reputation and a longer term outlook are important. Those firms that are successful are usually appreciated by their customers.

Hedge fund is now a meaningless term

Wow - great editorial from the FT. I have thought this for some time. Hedge funds are just funds. They are funds without many of the restrictions of conventional funds. They are the funds that are found in the financial theory. They can go short and long and take advantage of mis-pricing (if it exists).

FT.com / Comment & analysis / Editorial comment - Hedge fund is now a meaningless term: "The time has come to stop talking about hedge funds versus non-hedge funds, and to think about asset management as comprised of active and passive investors, with hedge funds a form of ultra-active management. In time, the industry is likely to polarise between the extremes, at the expense of traditional active management."

Tuesday, August 16, 2005

American investors move away from US assets

US investors diversify and add to the need for the US to attract overseas finance in order to maintain the value of the US dollar.
FT.com / Home UK - American investors move away from US assets: "�It is partly because of the dollar, partly corporate scandals. Both have been a wake-up call to investors with too much exposure to US equities,� said Brian Garvey, strategist at State Street bank."

Private equity: returns and size

Is there a paper looking at the return to private equity funds compared to the size? Is the data available?

FT.com / Lex - Lex: Private equity: "Interestingly, in the US, it is not clear that size confers much of an advantage. According to data from Private Equity Intelligence, of a sample 77 US funds that were in the top quartile by size between 1988 and 2003, only a tiny majority beat the median internal rate of return hardly a head start. Intriguingly, large European funds did a little better relative to the benchmark. One factor that might explain this difference is the higher degree of competition in the US. "

Friday, August 12, 2005

US shares buyback

Is this a possible area for research? Does the market reward the purchase and calcellation of shares?

FT.com / Markets / Investor's notebook - Market Insight: Show of strength with US shares buyback: "Combined with the fact that companies are under no legal obligation to follow up the announcement of a buyback programme with the actual repurchase of stock, this makes buybacks a poor yardstick for stock selection, says Mr McVey, who contends that the market has not rewarded shrinkage of share count since 2002.
Tobias Levkovich, the chief US equity strategist at Citigroup�s Smith Barney unit, would beg to differ. He says that his analysis shows �such companies tend to outperform and thus we contend that such [buyback] programmes are a good use of cash�. Alongside dividends, investment strategists see buybacks, as a method to deprive management teams of cash they would otherwise use for investments that turn out to be wasteful in the long run."

How Do Small Firms Manage Interest Rate Risk?

FRBNY paper on how smaller firms manage interest rate risk.

How and Why Do Small Firms Manage Interest Rate Risk? Evidence from Commercial Loans - Federal Reserve Bank of New York: "Although small firms are most sensitive to interest rate and other shocks, empirical work on corporate risk management has focused instead on large public companies. This paper studies fixed-rate and adjustable-rate loans to see how small firms manage their exposure to interest rate risk. The cross-sectional findings are as follows: credit-constrained firms consistently favor fixed-rate loans, minimizing their exposure to rising interest rates; firms adjust their exposure depending on how interest rate shocks covary with industry output; and �fixed versus adjustable� outcomes are correlated with lender characteristics. In a twenty-eight-year time series, the aggregate share of fixed-rate bank loans moves with interest rates in a manner consistent with recent evidence on debt market timing. I conclude that the �fixed versus adjustable� dimension of financial contracting helps small U.S. firms ameliorate interest rate risk, and discuss the implications for risk management theories and the credit channel of monetary policy."

Friday, August 05, 2005

EU firms enjoy US spending spree

Part of the reason that the USD has held up despite the huge current account deficit?

BBC NEWS | Business | EU firms enjoy US spending spree: "The volume of US companies being taken over by their European rivals is now nearing its highest level in four years, according to a financial report.
So far this year businesses in Europe have spent $47.2bn (�27bn) buying up 262 of their American counterparts. "

Power of Implied Volatility

Paper about implied volatility and its forecasting power.

SSRN-Forecasting Power of Implied Volatility: Evidence from Individual Equities by Jonathan Godbey, James Mahar: "Assuming use of the correct option pricing model and an efficient market, an option's implied volatility is the market's consensus forecast of future realized volatility over the remaining life of that option. We examine 460 of the S&P 500 firms to demonstrate that 1) implied volatility is a better forecaster of realized volatility than historic volatility or GARCH models and 2) the information content of implied volatility significantly decreases with liquidity. Since individual equity options are American style, we obtain implied volatility from calls and puts separately rather than only calls or pooled data. "

Wednesday, August 03, 2005

Econommic development

This is mahalanobis highlighting a paper that compares development in various regions with the average of the OECD. Mahalanobis: "The table also reveals that the fastest learning countries are China, India and the East Asian group. Remarkably, China has experienced over four centuries of base trajectory OECD growth in the last 52 years taking it to year 1917 levels on the OECD trajectory. India and the East Asian group of countries have experienced more than three and a half centuries of base trajectory growth in 52 years, taking them to mid-nineteenth century OECD levels of income.'[1]"

Monday, August 01, 2005

Futures trading activity and predictable foreign exchange market movements

Paper by Changyun Wang on futures and trading in FX.

ScienceDirect - Journal of Banking & Finance : Futures trading activity and predictable foreign exchange market movements: "In this paper, we examine the relation between futures trading activity by trader type and returns over short horizons in five foreign currency futures markets � British pound, Canadian dollar, Deutsche mark, Japanese yen, and Swiss franc. Transforming trading activity into a sentiment measure, we find that speculator sentiment is positively related to future returns. In contrast, hedger sentiment covaries negatively with future returns. We also find that extreme sentiment by trader type is more correlated with future market movements than moderate sentiment. Our results suggest that hedgers lose to speculators in these futures markets, on average. Based on equilibrium pricing models that futures risk premiums are determined by both market risk and hedging pressure, we show that the profits to speculators are in general compensation for bearing risk."