Wednesday, December 20, 2006

Volatile Weather and Markets and the Demise of Mutual Funds?

This morning there was snow on the ground here in Burlington, VT and there were occasionally snow showers throughout the day. The markets opened steeply lower following a 15% plunge in the Thai stock market and the housing and PPI reports. The US Dollar fell a bit and the markets recovered, with the Dow and S&P 500 ending up on the day. The wave does look corrective on the NDX and the late day sell-off came pretty much where one would expect. The original model forecast was for Wednesday to be the first down day, so I am still expecting a down move tomorrow (which might rescue some of the bad intra-day trades I did today :)).

An interesting article about the potential demise of active mutual funds. Seems that the PF community is on board with the beta part of the story (buy index funds, ETFs, or futures) but doesn't recognize that some managers actually do add value (beta). The question is why pay a manager of a mutual fund or hedge fund to generate both alpha and beta returns when the beta can be bought very cheaply elsewhere. Maybe hedge funds as well will be forced to move to a model where managers are only rewarded for supplying alpha. Contrary to what the author writes, hedge fund managers are in most cases currently rewarded for both alpha and beta.

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