Persistence and Mean Reversion in Market Data
(Mar 2013)
Jason Voss at the CFA Institute has recently written a very interesting series of posts on the Hurst exponent, which is "a method for detecting persistence, randomness, or mean reversion in financial markets." The Hurst exponent measures the degree to which a signal depends on previous values--a phenomenon known as autocorrelation--and specifically whether values tend to 'switch' (e.g., high values followed by low values) or 'persist' (e.g., high values followed by other high values). Jason...
SEC Litigation Releases: Week in Review - March 1st, 2013
(Mar 2013)
Defendant Adam S. Rosengard Settles SEC Charges in Penny Stock Manipulation Case
February 27, 2013, (Litigation Release No. 22626)
A final judgment was entered this Monday against Adam S. Rosengard for his alleged involvement in a stock manipulation scheme. According to the SEC's original complaint, Pawel P. Dynkowski and other defendants manipulated the price of Xtreme Motorsports of California, Inc.'s stock through "wash sales, matched orders and other manipulative trading." Rosengard then...
Evolution of Absolute Return Structured Products
(Feb 2013)
From 2006 to 2009, a type of structured product known as an absolute return barrier note (ARBN) was issued by a variety of major investment banks. ARBNs are interesting because they are linked to the absolute value of the return on an underlying, not just its return, and therefore are considered non-directional bets. We've done a lot of work on ARBNs here at SLCG, including a research paper that values a sample of ARBNs and finds they are worth on average 4.5% less than their purchase price...
SEC Issues Letter Regarding Structured Product Valuation Disclosures
(Feb 2013)
Bloomberg's Kevin Dugan is reporting that the SEC has issued a letter to issuers of structured products late last week that offers guidance for the disclosures of estimated value in offering documents. The SEC letter addresses the concerns we and others have shared over the potential mispricing of structured products, which can be and are sold to retail investors -- you can read through our research papers on the topic.
The letter confirms that the SEC will require--though it is not clear...
SEC Examination Priorities 2013
(Feb 2013)
Last week, the Securities and Exchange Commission announced their examination priorities for 2013 "to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk, and to support the SEC's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
For those that are unfamiliar, SEC staff conducts examinations of SEC registrants through their regional offices and headquarters
to determine...
SEC Litigation Releases: Week in Review - February 22nd, 2013
(Feb 2013)
SEC Charges Fund Manager in Scheme Involving Risky Mortgage-Related Investment
February 20, 2013, (Litigation Release No. 22622)
According to the complaint, George Charles Cody Price "raised $18 million for three investment funds through his firm ABS Manager LLC" promising investors that their investments were "secured by government-backed bonds yielding extraordinary double-digit returns as high as 18 percent per year." In reality, Price was allegedly "investing in one the riskiest tranches...
How Big of an Effect Does Securities Lending Have on ETF Returns?
(Feb 2013)
We earlier posted an analysis that compared ETF returns to their stated index net of fees for funds that lend securities and those that do not. IndexUniverse subsequently suggested an approach with methodological differences from our original work and we wanted to address some of those differences here.
For our sample, we used Bloomberg's ETF function to collect all US-domiciled, USD-denominated exchange-traded funds and removed any with active trading strategies, leverage, or inception dates...
Securities Lending by ETFs
(Feb 2013)
One of the most contentious but least understood aspects of the stock market is short selling. Short selling refers to selling a stock that you do not own at current market prices, with the hopes that the stock will go down in price. The stock can be purchased in the market at any time to close out the position and, if the stock has decreased in price, the short-seller will realize a profit. Obviously, the only way to accomplish this is by borrowing that stock from someone else.
Typically,...
Chinese Markets are Closed--So What Happens to China-based ETFs in the US?
(Feb 2013)
Happy Chinese New Year! Markets were closed in many Asian countries last week, while US markets remained open. As noted by several commentators, this means that while US ETFs that hold Chinese equities were actively traded, their underlying assets were not. So what does this mean for China-based ETFs traded in the US?
First, it's important to note how ETFs relate to their underlying assets. Essentially, ETF shares can be created by certain traders (called authorized participants) by buying...
Structured CDs: The Big Picture
(Feb 2013)
This week we have reviewed some of the issues surrounding structured certificates of deposit, giving an introduction, example offering documents (both simple and complex), the basics of FDIC insurance of these products, and a description of some of the tax implications investors should be aware of. We hope we have conveyed our reasons for thinking that structured CDs are complex and risky investments that, like structured products, are rarely suitable for retail investors.
But there is a...
