Friday, April 30, 2004
A Mutual Funds Employee Strikes Back!
Here's an email I received from a mutual fund company employee, taking issue with my characterization of market timeing.
The "market timing" phrase used in the current mutual fund
industry scandal is actually a misnomer. A more fitting name might be time
zone arbitrage or fund pricing arbitrage. Market timing as it has been
defined in the past (though not recently) is perfectly legal and is the
primary method stock and bond speculators use to beat the market. For
example one might move their money out of bonds into stocks or cash or
something else if they felt their was going to be a change in market
dynamics. So those ads for market timing really are for something different
that the illegal and/or immoral actions taken by some mutual fund companies.
As a employee of a mutual fund company, I know that the time zone arbitrage
that was taking place was generally the work of a few bad apples. though I'm
not sure how upper management allowed it to happen.
My response: Hey, if someone buys into a Rydex or ProFunds fund, he ought to expect to be subsidizing market timing activity. But in cases where the prospectus states the fund doesn't allow market timing, and the fund management lies to shareholders and allows it anyway for certain favored clients on the sly, then that's fraud.
And market timing costs shareholders an estimated $5 billion a year, according to Stanford economist Eric Zitzewitz.
In yesterday's I was specifically referring to market timing, and NOT to late trading techniques, or specifically to date line/time zone arbitrage, except that market timers often use those techniques to determine specific entry points into certain funds.
So it's tough to separate the two practices.
I will agree with the letter writer that a garden variety commercial market timing system which calls for just a couple of trades a year is not terribly destructive to most funds returns, as long as only a few people practice the technique.
Heck, I'm a market timer in a sense, too. I shouldn't talk. I bought Vanguard Emerging Markets aggressively last summer, as soon as I got Internet access in Iraq. But China feels bubbly, and can't sustain its prodigious rate of growth. Brazil's had a great run, but overall the fund had begun to sputter out even on good news, and so I raped the other shareholders in the fund by it off completely at the beginning of April. (It saved me a 6% loss over the last month!)
I may buy some back if emerging markets lose30% off their peak or so.
But then, I will admit to being evil.
It's just interesting to see the dichotomy between Dr. Paul Farrell's buy-and-hold advice on the one hand, and the companies which advertise on the site
It's easy to see why management allowed the criminal abuses to occur, though: Greed. They were simply bribed by the prospect of fees from 'sticky money.'
And when it comes to the main street investor, the financial services industry is too often an ethics-free zone.
Splash, out
Jason
The "market timing" phrase used in the current mutual fund
industry scandal is actually a misnomer. A more fitting name might be time
zone arbitrage or fund pricing arbitrage. Market timing as it has been
defined in the past (though not recently) is perfectly legal and is the
primary method stock and bond speculators use to beat the market. For
example one might move their money out of bonds into stocks or cash or
something else if they felt their was going to be a change in market
dynamics. So those ads for market timing really are for something different
that the illegal and/or immoral actions taken by some mutual fund companies.
As a employee of a mutual fund company, I know that the time zone arbitrage
that was taking place was generally the work of a few bad apples. though I'm
not sure how upper management allowed it to happen.
My response: Hey, if someone buys into a Rydex or ProFunds fund, he ought to expect to be subsidizing market timing activity. But in cases where the prospectus states the fund doesn't allow market timing, and the fund management lies to shareholders and allows it anyway for certain favored clients on the sly, then that's fraud.
And market timing costs shareholders an estimated $5 billion a year, according to Stanford economist Eric Zitzewitz.
In yesterday's I was specifically referring to market timing, and NOT to late trading techniques, or specifically to date line/time zone arbitrage, except that market timers often use those techniques to determine specific entry points into certain funds.
So it's tough to separate the two practices.
I will agree with the letter writer that a garden variety commercial market timing system which calls for just a couple of trades a year is not terribly destructive to most funds returns, as long as only a few people practice the technique.
Heck, I'm a market timer in a sense, too. I shouldn't talk. I bought Vanguard Emerging Markets aggressively last summer, as soon as I got Internet access in Iraq. But China feels bubbly, and can't sustain its prodigious rate of growth. Brazil's had a great run, but overall the fund had begun to sputter out even on good news, and so I raped the other shareholders in the fund by it off completely at the beginning of April. (It saved me a 6% loss over the last month!)
I may buy some back if emerging markets lose30% off their peak or so.
But then, I will admit to being evil.
It's just interesting to see the dichotomy between Dr. Paul Farrell's buy-and-hold advice on the one hand, and the companies which advertise on the site
It's easy to see why management allowed the criminal abuses to occur, though: Greed. They were simply bribed by the prospect of fees from 'sticky money.'
And when it comes to the main street investor, the financial services industry is too often an ethics-free zone.
Splash, out
Jason
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