The Clawback Index: How will it Change the Game?

Back to business today boys. After all...it's Saturday! I want to address two (IMHO) key issues for the finance world going forward. These issues will specifically effect those of you entering Wall Street soon and those who have hit the ground running recently. Both issues were addressed in the online WSJ over the last 24 hours. Here they are:

1) The Clawback

Irving Picard. Here's a name most of you don't know, but should. He is the trustee in charge of recovering money for Madoff's ponzi victims...

and

Arguably, the archetype of a new sort of BSD going forward.

To this point, Mr. Picard has recovered a whopping $1.5 billion for Madoff victims and is now looking to eek out $69 million more before his statute of limitations window closes.

Mark my word, fellas. Clawback is a word you'll be hearing a lot more of in the future. Though many of us don't think of it as such it could grow into an investment vehicle of its own sort.

followed by the seemingly unrelated...

2) Rise of Index Fund Dominance

Well...perhaps this isn't the most accurate title. Though a very strong argument is laid forth as to why index funds will become tougher to beat by the individual investor...the underlying point is really that which we all fear...

beating the market...already a tough nut to crack...is only going to get harder

The reason I bring up these two issues at the same time is that I know many of you guys dream of the green pastures of Hedge Funds and Portfolio Management...

I am not saying that this particular future is an impossible dream, I just think you guys should consider alternatives...

Changing environments and dynamics offer new opportunities. Naturally, it's on you to figure them out. Returns on equity investments will inevitably continue to dwindle.

Conversely, many an attorney (just ask Harvey R. Miller) will seek new found wealth in clawback battles which (again, IMHO) have not even begun to brew.

The real question is...

what will you do? ...

In order to become the success you dreamed of becoming, now that the world which birthed those dreams...

No longer exists

Comments (10)

 
Nov 27, 2010 - 6:12pm

Midas Mulligan Magoo:


the underlying point is really that which we all fear...

beating the market...already a tough nut to crack...is only going to get harder

The reason I bring up these two issues at the same time is that I know many of you guys dream of the green pastures of Hedge Funds and Portfolio Management...

Do you think that working in passive portfolio management will become a more attractive route?

 
Nov 27, 2010 - 11:16pm

econ:
Midas Mulligan Magoo:


the underlying point is really that which we all fear...

beating the market...already a tough nut to crack...is only going to get harder

The reason I bring up these two issues at the same time is that I know many of you guys dream of the green pastures of Hedge Funds and Portfolio Management...

Do you think that working in passive portfolio management will become a more attractive route?

This is a pretty general question with a myriad of possible answers. I'll say that generally there will be more gigs coming available in passive investing vs active daily volume dependent trading in the next decade. Whether that makes ppm a "more attractive route"...well what's more attractive to you the 6 that gives it up steady or the bipolar 9.8 that might land you in the clink but is one hell of a good time? There are no right answers here, my crystal ball is as good/bad as the next man's.

 
Nov 27, 2010 - 6:25pm

In general I think its more difficult to beat a benchmark the more closely correlated the portfolio is to the underlying. In ETFs this this even more present. Currently correlations are universally too high. Stocks are all moving together, stocks in the same sector have even less variation. One of the main strategies that I follow is relative value trading. Directional relative value trading is becoming more and more difficult because everything is moving together. The best stocks in a sector are not outperforming their sector ETFs as much as they could and the worst stocks are not being beat down as much as they could. Arb funds are using ETFs to game the structure of the market and since the bottom in March 2009 this pattern has held. Not saying it is going to hold forever but it is for now.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 
Nov 27, 2010 - 9:21pm

trade4size:
In general I think its more difficult to beat a benchmark the more closely correlated the portfolio is to the underlying. In ETFs this this even more present. Currently correlations are universally too high. Stocks are all moving together, stocks in the same sector have even less variation. One of the main strategies that I follow is relative value trading. Directional relative value trading is becoming more and more difficult because everything is moving together. The best stocks in a sector are not outperforming their sector ETFs as much as they could and the worst stocks are not being beat down as much as they could. Arb funds are using ETFs to game the structure of the market and since the bottom in March 2009 this pattern has held. Not saying it is going to hold forever but it is for now.

I think that may be a function of the market - the market is getting driven by bad news in politics and macro shocks. Once we get out of a bear market things will start to diverge again.

 
Nov 27, 2010 - 9:32pm

monkeysama:
I think that may be a function of the market - the market is getting driven by bad news in politics and macro shocks. Once we get out of a bear market things will start to diverge again.

Yeah, it really is a macro market nowadays with high correlations across the board at their highs but in a few (years?) it'll go down.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
 
Nov 27, 2010 - 11:02pm

monkeysama.... HELLO?!?! ANYONE HOME?!?!?! THINK MCFLY THINK!

"once we get out of a bear market"...... dude we are like 44% off the 666 lows in the S&P..... The Naz 100 is trading just off the 2007 highs. This is not a bear market anymore.

But please continue about how once this "bear market" is over things will diverge again.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 
Nov 28, 2010 - 1:17pm

I completely agree with the idea that passive management will eventually overtake day trading as the more attractive route. That being said, I don't think day trading will ever not be an option, regardless of the market, investing climate, etc. As long as their are places like Etrade there will be day trading.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
Nov 28, 2010 - 6:48pm

trade4size - I think that what I am referring to is a global bear in that the markets are skittish on large macro shocks such as Ireland/Portugal/Spain, domestic municipal bond default, high unemployment. I don't think that pure index values reflect what I meant although maybe I am not exactly correct in my definition of a bear market.

 
Nov 28, 2010 - 7:24pm
"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
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