We have clearly heard about how some of the financial institutions have been hit by the mortgage issues, but not much has been reported if Fidelity has suffered any damage.
I would like to hear opinions on this. Maybe there is a mortgage arm of Fidelity I am not aware of.
Thanks,
Dave C.
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Fidelity Investments is privately held, so information on its financial health is not going to be at all well publicized. Importantly, Fidelity does not run a banking division. This contrasts with companies like Morgan Stanley, Goldman Sachs and Merrill Lynch, all of which are publicly traded and do run banks (underwriting new businesses, etc. for one). They also sold subprime CMOs.
It crossed my mind to wonder whether perhaps Fidelity had hedge funds. I found this fascinating 2004 comment by Fidelity on the subject:
"Fidelity Investments has no plans to enter the hedge fund retail marketing business, such disclosure was made by Robert Reynolds, the vice chairman and investment officer for Fidelity. According to Mr. Reynolds, running mutual funds and hedge funds under one roof may create a conflict of interest he explained. Reynolds said, "We have elected not to provide those types of funds, and we don't see that changing in the near future." The article goes onto report that a number of Fidelity managers have defected to the hedge fund industry.
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(dated 2004 using other sites that quote the same). More recent articles say that many who defectees are now returning to Fidelity. Starting this month, I see that Fidelity started offering FOTTX, which one article calls "Hedge Fund Lite." It shorts stocks (but overwhelmingly large and mega cap ones) from time to time. See
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Fidelity, like all brokerages, offers investors mutual funds focused on CDOs and mortgage backed securities, etc. But none of Fidelity's own funds are so focused. Fidelity's operations are nothing like, say, Goldman Sachs, which pushed its own subprime mortgage based funds while simultaneously, and unknown to investors, shorting its own funds. If Fidelity suffers any damage, I would expect it to be only by way of reduced trading while its customers take a deep breath.
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Fidelity just started a true hedge fund called the 130/30 fund. It permits 30% shorts. It has one of the best results YTD.
I distinguish true hedging - holding contrary positions - from so-called hedge funds. The latter are nearly-unregulated "cowboy funds" limited to 99 or fewer rich investors.
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The fund I mentioned earlier, FOTTX, is called Fidelity's "130/30 Large Cap fund." It is not held privately, so I do not think it meets the definition of a "hedge fund."
YTD performance is a criterion I never use to buy stocks or funds. It's way too short a time period.
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I think Rick made that clear when he pointed out that it's not a "hedge fund" but rather "a fund which actually hedges".
That said, 130/30 is a category of mutual fund which has become one of the current new hot things out there. If you go to Morningstar, and put "130" into the quote box, it'll come up with a list of 50 "130/30" funds (well, many have multiple share classes, but narrowing it down from there, it's 11 new funds from a variety of companies all doing a "130/30" strategy.
However, I don't think I agree with Rick, either, that it's really a "fund which hedges". These funds typically have net equity exposure of 90% or so. (the 130 long minus the 30 short, with some room for cash and such).
I'd call them closer to true hedging assets if they were much closer to 0 net equity exposure - true and full (or closer to full) hedging - and thus yielding highly UNcorrelated results.
These 130/30 funds are going to have results very highly correlated with the broader equity market, and generally to the large-cap market (since that seems to be where most of them play). If anything, I'd expect them to behave more like slightly amplified S&P 500 funds.
The useful characteristic of a real hedge fund (whether "hedge fund" in the current popular definition thereof or not) is that it doesn't behave that way.
I don't think any of the currently available 130/30 funds has been out there long enough, though, to really measure their correlation the the index very well. Not yet. Give them a couple of years, I suppose.
For what it's worth, there have been funds which engage in "pairs trading" around for years, though it's a very difficult task (generally one matches a long position with a short position, often with a pair of companies in the same business - the bet is not on that industry, but rather just that one of the two will outperform the other one). There are also fund which are allowed to sell short and/or borrow cash to lever up their returns.
That all said, if you are really looking for uncorrelated assets, 130/30 funds shouldn't be expected to fit the bill. If you Google for "long-short funds" you'll find lots more about "absolute return" "market-neutral" and "arbitrage" funds. Some of them have done quite well over the longer run - passable returns with very low volatility.
Here's a recent Morningstar article on long-short funds:
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$7853 (if it doesn't come up, just search for "long-short" on their front page)
AKA the latest in the Steady Stream of BS Churned Out by Wall Street!
Not specific to Fidelity's fund, but a 130/30 strategy seems less appealing if presented this way:
put 00 into an account
borrow 0 and pay interest on it
buy 00 of a broad-market index fund
sell short 0 worth of a broad-market index fund
pay someone a management fee to do all of the above
Obviously nobody would do that, it's a recipe for siphoning money out of an account, vs. just holding $1k of the index fund. But to buy into a
130/30 strategy one needs to believe in active management (in this context, stock-picking) more so than in a long-only fund - that the manager is doing better than average (the market) with both the longs and the shorts.
Yet only a minority of long-only actively managed mutual fund managers "beat the market" as it is. A 130/30 adds the costs of leverage, and the difficulties of picking the short side. So even if the strategy has merit conceptually, there's still the "manager selection problem." I don't know how to identify, in advance, someone who is good at consistently picking both stocks that are going to go up, as well as those that are going to go down. Shorting is a difficult strategy to implement, the example I keep in mind is that Soros got taken to the cleaners during the dot-com bubble. And the Keynes maxim, "the market can remain irrational longer than you can remain solvent."
-Tad
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I prefer to be emphatic about distinguishing between the formerly very popular version of hedge fund (privately owned), where the managers did not have to publicly disclose their investments, and generally one had to be worth over a million bucks to buy into it, and the newer 130/30 bona fide mutual funds, which do have to disclose their investments and which Joe and Jane Average can far more easily buy.
I thought the wikipedia explanation of the 130/30 strategy under "Portable alpha" was interesting.
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