<BreadWithSpam[at]fractious.net> wrote
Re FOTTX, Fidelity's large cap 130/30 fund
- quote -

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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BreadWithSpam[at]fractious.net wrote:
- quote -

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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"Elle" <honda.lioness[at]gmail.com> writes:
- quote -

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/articlen...aspx?id=247853

(if it doesn't come up, just search for "long-short" on
their front page)

- quote -

Very good advice!




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"rick++" <rick303[at]hotmail.com> wrote
- quote -

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."

- quote -

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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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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"Dave C." <myaddress[at]microsoft.com> wrote
- quote -

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/...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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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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