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"Although we estimate that actively managed ETFs
represent roughly five percent of all the assets in US-traded ETFs,
we see interest on the rise, as evidenced by the number of such ETFs
being offered and launches by various fund managers. We think that
both existing fund companies and new entrants will increasingly be
looking at actively managed ETFs to both defend market share, and to
attract new money," S&P Capital IQ said in a recent research note. And
there's certainly room for actively managed funds such as SPDR SSgA
Global Allocation ETF to grow. Total AUM at US-listed ETFs and ETNs is
about $1.2 trillion, but actively managed funds had a less than $6
billion slice of that pie last month. While actively managed ETFs as a
group have flown under the radar recently, some fund sponsors such as
AdvisorShares, PIMCO and WisdomTree (WETF) have found success with
these products.
State Street certainly has the capability to promote SPDR
SSgA Global Allocation ETF and its other active funds, drawing in
assets along the way. Whether or not SPDR SSgA Global Allocation
ETF rewards investors for their good faith
remains to be seen. In the real world, no matter what the risk of
eventual loss is, the risk in a trading environment is much different
as the position grows. To sell a $1 million position, you can call any
number of dealers and get out at a price. If the first place you call
is out grabbing coffee, you don't care and just dial another dealer.
If you have $10 million, you have to be a bit more selective.
You need to work with someone a little bigger, possibly someone who
specializes in that bond. Alternatively, you can "spray" the street
and sell small size batches to a bunch of dealers. In any case, $10 is
harder to dispose of than $1 million. Selling $100 million in bonds
takes exponentially more effort. Instant liquidity is impossible. You
are going to have to work with someone very specialized or various
parties over an extended period of time. Your very action of selling
will move the market against you while you're in the process of
unloading the bonds. So in a "progressive" capital system, if five
percent is the "right" portion of capital to hold against a small
position, then at $10 million perhaps you're looking at 6% to offset
the risk of a larger position. By the time you get to $100 million it
is ten percent. This isn't saying that you cannot be large and
outsized in a position, but it is saying that you better evaluate
whether that extra risk is worth the extra capital charged.
Figuring out the "expected" loss may require some
ratings-based rule, or internal models; you should be willing to
concede that. But liquidity has nothing to do with ratings. The
liquidity will be applied diligently across all assets. Bernanke
worries that European bank insolvencies or liquidity issues may have
significant systemic impacts on US financial institutions – if
anyone knows, he should know. JPMorgan's losses elicited a response
from the US president about the immediate active role of government
with regard to issues at the TBTF banks. The FDIC announced its
policies, plans, and procedures to seize TBTF institutions when the
next financial crisis occurs. It has come to light that some TBTF
institutions have skirted laws and regulations. If there were no TBTF
institutions in the US, then little of the above would be of concern.
Instead:
1. While the European contagion would still be a worry, it
wouldn't be as much of a worry regarding its risk to our entire
financial system because no one institution alone would be a systemic
risk.
2. The government shouldn't ever have to "step in" if a bank failed. Sure,
there would be market reaction and shareholders and bondholders would
have consequences, but as long as the failed institution couldn't
cause systemic issues, there would be no need for government
(taxpayer) involvement.
3. The expensive and extensive policies and processes now being set up at
FDIC would be unnecessary.
4. Without the power that comes with being TBTF, the "naked" short-selling
and other abuses would be much less effective or profitable.
5. The TBTF institutions are so complex that even the likes of a Jamie
Dimon can't provide effective internal controls and
risk management. Smaller institutions that have such issues won't
cause systemic risk.
The lessons of the '08-'09 near systemic meltdown were clear:
TBTF is a huge policy issue. Unfortunately, after Dodd-Frank, not only
are TBTF institutions bigger and systemically more risky, but we now
have a government all too willing, and maybe even eager, to "step in."
This doesn't prevent banks from trading, but it does reduce
unnecessary complexity by charging them appropriately. Complex trades
are ones that require models or some other means of valuing. Massive
capital charges and hard limits are required here. There should be no
hedge accounting. If something needs to be complex and model driven,
they can use it, but the capital has to assume the worst case that
the position is far worse than anyone believes it could be. Complex
positions should be treated differently than simple positions.
Weather Trades' target audience includes hedge funds and
banks that trade in commodities connected to the weather. When we met
Weather Trades at the Tech Crunch Disrupt New York conference they
were ready to head over to talk with Barclays (BCS) to show them their
projections for sugar futures based on their Indian monsoon season
forecast. Weather Trades' Vice President of Business Development and
New Media Gary Zhou says that the company is still looking for hedge
fund partners and other clients in financial services. It's not just
farmers who need to keep an eye on the weather. Investors can use
information about future conditions to gain an advantage in the
market. Advanced knowledge of this past winter's warm weather could
have clued investors in to positive performance in home centers like
Home Depot (HD), and poor performance for
commodities like natural gas. |
