Hedge Fund Street

SEC Orders Independent Chairmen

From Voice of America:

"The U.S. Securities and Exchange Commission has ordered mutual funds to appoint board chairmen who are independent from the companies managing the mutual funds.

"The new rule follows an industry scandal that saw many investment companies accused of giving special trading privileges to favored clients, hurting average investors.

"The new rule is opposed by many in the $7 trillion mutual fund industry who say there is no evidence the change will help investors." Read More

Will ETF's Make Mutual Funds a Thing of the Past?

Suze Orman contends that mutual funds should be fading quickly as an investment strategy, due in part to the overwhelming benefits of exchange traded funds.

From Yahoo Finance:

"Mutual funds have been around for a couple of generations - and there are indeed still some good reasons to use funds - but folks, if you rely solely on mutual funds you are woefully out of touch.

"ETFs, which have exploded onto the investing scene over the past few years, are basically index mutual funds with one hugely important difference.

"Just like an index mutual fund, when you buy an ETF you are buying shares in a portfolio of dozens - if not hundreds - of stocks (or bonds)." Read More

Funds to Watch

Lauren Young gives her analysis of fund performance, noting some funds likely to outperform the market.

From BW Online:

"In the current state of the market, she sees mid-cap and larger stocks as better places to be than small-caps, and with bonds the choice should be short-term funds because of potential interest rate increases.

"Young, who covers mutual funds for BW, says the best fund choices for conservative investors could be names such as Dodge & Cox Income (DODIX ), plus Fundamental Investors (ANCFX ), Income Fund of America (AMECX ), and Washington Mutual (AWSHX ), all in the American family of funds." Read More

More Mutual Funds Closing Their Doors to Investors

Fund managers are taking actions to prevent investors from buying shares at a much higher rate than in previous years.

From the Houston Chronicle:

"Equity mutual funds are closing their doors to new investors at more than double last year's pace as money managers struggle to find stocks worth buying.

"Funds are shutting after almost $110 billion poured into stock funds during the four months ended April 30, the most since markets peaked four years ago.

"Many of the funds that are closing, including Eric Miller's $2 billion Heartland Value Fund and the $1.32 billion American Century Small Company Fund, focus on smaller companies." Read More

Use Caution With These ETF's

iShares MSCI Japan and iShares Dow Jones Select are two popular Exchange-Traded Funds getting a lot of attention, but some are wary of these investments.

From Forbes:

"The fund, however, is capable of both staggering gains (it posted a market gain of more than 60% in 1999) as well as losses (it has fallen by double digits in four of the last seven years).

"Japan remains susceptible to fears of an economic slowdown in China as well as rising interest rates in the United States.

"Its dividend requirements virtually rule out software, hardware, and media stocks and lead to a preponderance of financial companies (roughly 42% of assets, with most of that in banks)." Read More

SEC Ruling on Hedge Funds Expected Soon

Depending on an SEC ruling expected to come in the next few weeks, the popular investment pools may be forced to register with the agancy.

From Reuters:

"U.S. financial regulators look ready to put hedge funds on a tighter leash and may soon announce plans to force these loosely regulated investment pools to register with them, several lawyers said.

"The $850 billion hedge fund industry, whose greater trading freedoms have generated huge gains as well as some big losses, has been bracing for regulatory action since SEC staffers recommended hedge fund registration last fall.

"While hedge funds are still no match for the $7.6 trillion mutual fund industry, regulators are becoming increasingly anxious that average Americans could lose their nest eggs in an industry that isn't yet under regulatory control." Read More

Managing ETF's and Fund of Funds

Sanjiv Shah, director of Benchmark Asset Management Company answers questions about his approach to fund management, including Fund of Funds (FOF) and Exchange-Traded Funds.

From Indian Express:

" Since the ETFs are not available to retail investors through mutual fund distributors, we decided to come up with this FoF.

"It will help bridge the gap between us and the last mile contact, the mutual fund agents.

"Our belief is that the equity markets will continue to give returns higher than any other asset class." Read More

Relying on Past Performance Not Likely to Lead to Big Payoff

When attempting to evaluate mutual funds, it is always tempting to look to past performance as an indicator of future success. In practice, however, predicting winners and losers requires much more insight.

From Financial Times:

"Fund company ads and, unfortunately, business journalists often abet this ill-advised behaviour by touting one- or even three-year performance.

"The [Swedish] government offered its citizens 450 funds from which to choose, and the overwhelming favorite among investors was an Internet fund that had posted the best returns the prior year. The fund subsequently declined by roughly 80 per cent - offering a painful lesson in chasing performance. Read More

Regulators Uncover Improper Behavior

Allegations have come out against several large investment companies, accusing them of taking advantage of seniors and other potentially vulnerable investors.

From the Rapid City Journal:

"The Securities and Exchange Commission and the National Association of Securities Dealers, the brokerage industry's self-policing organization, released a joint staff report Wednesday on the results of their inspections of more than 100 investment firms.

"In the past two years, the NASD has taken more than 80 disciplinary actions against brokers and investment firms - including American Express, Prudential and Waddell & Reed - for alleged abuses in sales of variable annuities." Read More

Hedge Funds Become Available to Average Investor

Formerly reserved for those with large amounts of investable assets, hedge funds are now becoming more available to everyday investors. Their heightened risk and relaince on manager skill have traditionally resulted in stiff regulations and monitoring.

From Connecticut Business:

"Their managers wager on short stock sales, play leverage and arbitrage games, and count the incomprehensible cards of derivatives to make a profit.

"According to the Hedge Fund Research Group, hedge funds returned 15 percent from 1990 to 2002, compared with 9.1 percent for the Standard & Poor's 500 index.

"College endowments, insurance companies and charitable foundations also are big users of hedge funds." Read More

Periods of Poor Performance for S&P 500 Funds

While the S&P Index has historically been a strong performer, S&P Index funds have endured a few periods of disappointing returns.

From Yahoo:

"Despite its overall success, there were three periods in which the Index lagged: 1965-1968, 1977-1980, and 1991-1993.

"The S&P 500 gained a respectable 15.6 percent annually during this period, but the rest of the market rose at the rate of 22.5 percent.

"During 1994-1998, the S&P 500 Index outpaced 75 percent to 90 percent of managed funds over four consecutive years." Read More

Questioning the Roles of Fund Directors

Sheldon Jacobs is sharing his belief that fund directors serve little to no practical purpose, either as watchdogs or as strategic advisors of funds. Few others, however, share his belief that fund boards should become a thing of the past.

From MLive:

"If a fund were organized without directors, "I just don't think there would be an awful lot of difference -- and it would be cheaper to operate" without directors' salaries and related expenses, he says.

"Moreover, while every fund is technically a distinct corporate entity that hires a manager such as Fidelity Investments or Putnam Investments to run its portfolio, 'the idea that the fund is independent is simply a fiction, a myth,' says Mr. Jacobs.

"Funds operate without directors in a number of other nations, including the United Kingdom and Australia." Read More

Insight Into Factors that Determine Fund Performance

While it is tempting to look to past performance as an indication of future mutual performance, this logic has been proven to be somewhat irrational. Present holdings are a better indicator, but at times can be difficult to uncover.

From the Contra Costa Times:

"Since every dog will have its day as we move through different periods of an economic cycle, style analysis distinguished itself as the second most important factor in determining mutual fund performance -- second only to the direction of the entire market, which determines 70 percent of any fund's performance.

"The outcome of the studies determined that an analysis of the current portfolio of stocks owned by the fund was a far more accurate predictor of future results than just looking at past history of the entire fund.

"Here we are virtually worshipping the past history and star ratings of these mutual funds, while scholarly evidence suggests that past performance may not represent the best criterion for choosing a fund. Read More

SEC Files Suit Against Geek Securities for Trading Abuses

According to Forbes:

"Florida investment firm Geek Securities Inc, its owner and one of its brokers are the latest to be charged with mutual fund trading abuses.

"The Securities and Exchange Commission filed fraud charges Monday against Geek Securities and its advisory arm, along with owner Kautilya 'Tony' Sharma, 39, of Delray Beach, Fla., and broker Neal Wadhwa, 27, of Ft. Lauderdale, Fla.

"The SEC's civil lawsuit, filed in federal district court in West Palm Beach, Fla., claims Geek, Sharma and Wadhwa engaged in 'pervasive market timing and late trading' in mutual funds on behalf of institutional investors, including several hedge funds." Read more

Domestic Equity Funds Finally Showing Signs of Life

Standard & Poor's says that mutual funds are shaking off poor winter performances and beginning to show indications that they will benefit from a positive economic environment throughout the rest of the year.

PRNewswire reports:

"According to Fund Advisor, Standard & Poor's Web based mutual fund reporting service, the average domestic equity mutual fund returned 1.40% in May -- its highest average monthly return since January of
this year when equity funds put forward a 2.30% return.

"'Standard & Poor's believes equities will end the year up, with the S&P 500-stock index rising to 1215 by year-end because of strong economic expectations and good earnings prospects,' says Sam Stovall, chief investment strategist at Standard & Poor's.

"According to Standard & Poor's mutual fund database containing performance data on over 16,000 U.S. mutual funds, mid-cap funds lead the charge in the month of May retuning an average of 1.76%. Large-cap funds were up 1.23% for the month, while small-caps trailed them slightly at +1.11%." Read More

Milberg Weiss Sues Citigroup for Allegedly Paying Undisclosed Incentives to Brokers

Forbes reports:

"Citigroup Inc., the world's largest financial services company, was sued for allegedly paying undisclosed incentives to brokers for selling in-house mutual funds, plaintiffs' lawyers said on Thursday.

"The lawsuit was filed on May 28 in Manhattan federal court by Milberg Weiss Bershad & Schulman LLP, a prominent specialist in class-action securities lawsuits. A Smith Barney spokesman handling the matter was not immediately available for comment." Read more

Kiplinger Lists Top 25 Mutual Funds

The Kiplinger 25 includes U.S. stock funds ABN Amro/Montag & Caldwell Growth N (MCGFX), Aegis Value (AVALX), American Century Equity Income (TWEIX), Brandywine Fund (BRWIX), Bridgeway Aggressive Investors 2 (BRAIX), Century Small Cap Select (CSMVX), Clipper Fund (CFIMX), Legg Mason Opportunity Primary (LMOPX), Marsico Growth (MGRIX), Masters’ Select Equity (MSEFX), Meridian Growth (MERDX), Oakmark Fund (OAKMX), Olstein Financial Alert C (OFALX), T. Rowe Price Equity Income (PRFDX), T. Rowe Price Growth Stock (PRGFX), Selected American Shares (SLASX), Selected Special Shares (SLSSX), TCW Galileo Select Equities I (TGCEX), Third Avenue Real Estate Value (TAREX), Vanguard Health Care (VGHCX), and international funds Artisan International (ARTIX), Masters’ Select International (MSILX), Oakmark International (OAKIX), T. Rowe Price International Discovery (PRIDX), Tweedy, Browne Global Value (TBGVX).

According to MSN Money:

"In choosing our all-star funds, we examine objective, easily verifiable information, such as past performance and expenses. But selecting funds is an attempt to forecast future performance -- no easy task. So we also apply our judgment, molded by years of watching and talking with fund managers and those who analyze funds." Read more

Number of Hedge Funds Increasing

According to the Financial Times:

"The number of hedge fund managers registered with the Securities and Exchange Commission has risen sharply in the past year, even as the industry lobbies against proposals by the SEC to require registration.

"Data from the Investment Counsel Association of America shows that the number of registered hedge fund managers grew by 18 per cent in the year to April, to 601. The total number of investment advisers grew by 5 per cent, to 8,302."

Davenport & Co. Fined $738,000 for Improper Trading

According to the Washington Times:

"Davenport & Co. of Richmond, Va., agreed to pay $738,000 to settle charges it helped investors make improper trades, the Wall Street Journal reports.

"The firm agreed to pay $450,000 in fines and $288,000 in restitution to annuity investors.

"The National Association of Securities Dealers, which regulates securities brokers, said Davenport helped two hedge fund clients make rapid trades in variable annuities that don't allow such trading." Read more

Dow Jones to Create Hedge Fund Index Nov. 1

From HedgeCo:

"Dow Jones has announced that it will begin the publication of a Hedge Fund Index this Nov 1. According to a new press release, the new DJHFI 'was created to underlie investable products.'

"According to Mike Petronella, president of Dow Jones Indexes/Ventures and director of DJHFI, 'The Dow Jones Hedge Fund Strategy Benchmarks represent the unique returns of five robust hedge fund strategies, offer risk control through diversification and leverage guidelines, and provide the transparency needed by this growing investment class.'" Read more

Putnum Funds Struggle in Wake of Scandal

MSN Money reports:

"No mutual fund company has suffered more in the scandals of the last 10 months than Putnam Investments. Investors have yanked tens of billions of assets, and that financial hemorrhage is far from over.

"Corporate 401(k) plans are continuing to drop Putnam as an administrator." Read more