- Hedge funds and other similarly unregistered entities compete with a huge advantage, over Mutual funds, Investment companies.
- Mutual funds, both open end, closed end and unit investment trusts (all Investment Company Act of 1940 entities) operate primarily in regulated "open" markets.
- Hedge funds enjoy a veritable blanket of secrecy, undisclosed securities positions, borrowing / leverage, insurance, credit default swaps.
- Having seen the trades that generated enormous profits at its hedge fund clients through Prime broker operations, certain banks / broker dealers, despite SEC, AICPA and FASB efforts in the 2004/5 era to rein in certain risky activities in off balance sheet / so called special purpose entities (think Enron) - SIVs special / structured investment vehicles being the most recent moniker, got into the leveraged spread trades, only in a much more leveraged fashion and as the music was beginning to fade (the end of the real estate asset bubble).
- Hedge funds and the securities, insurance contracts CDS (Credit default swaps) in which they invest and real or synthetic (explicit or implicit) leverage thereon NEED to be exposed to the full light of day to address this most fundamental information imbalance.
- As a result mutual funds, having to operate openly, are by definition placed at a competitive disadvantage due to having to disclose positions - twice a year; causing an "information" drain of a portfolio managers "best ideas" - to the disadvantage of shareholders. It's as if an NFL football team would disclose its playbook - long ago protected as trade secrets. Notwithstanding the common lack of authority to short securities.
- I believe, although am a bit unsure, that few, if any mutual fund boards (not to mention the industry's lobbying arm Investment Company Institute) took any action to "protect" its funds' shareholders from the above information disclosure disadvantage; I'd be much obliged if any bloggers may have data to address this point (Max are you out there?)
- I'd also be grateful if there is a data set that may show what if any deliberation(s) on this point may or may not have been part of any mutual fund board minutes.
- Shareholders, all Americans, except those high net worth accredited investors, in same - are negatively disadvantaged.
- Importantly, the vast majority of 401k holdings are in mutual funds; in the "open" market.
- All securities, contracts, CDS (whether registered or not) should be standardized to the extent possible and be required to trade on new or adapted open / regulated exchanges - not allowed to remain, and potentially subject to abuse by rogue OTC (over the counter) market makers and traders and or colored counterparties.
- Technology exists to enable an "anonymous" reporting of same trades; open, transparent verifiable price discovery affords ALL market participants with indicators / sources of value; vastly reducing "judgment calls" implicit in mark to models and so called level 3 "difficult to value assets".
Sunday, October 19, 2008
Turning DARKNESS into light = Office of Financial Stability / Bailout "POTS"
Much of what ails the financial markets WAS CREATED IN DARKNESS - hence disclosure in the "full light of day" and attendant scrutiny needs to dawn upon same.
The future confidence of all investors from sovereign wealth funds to individual shareholders will benefit when they can truly see "what's going on"!