Filings

13F - SEC form filed by institutional investment mangers (see section 13(f) of Securities and Exchange Act of 1934)... all institutional investment managers managing over $100MM on the last trading day of any month of the calendar year must disclose their holdings on a quarterly basis

Interest Rate Movements

Interest-rate movements are based on the simple concept of supply & demand. If the demand for credit (loans) increases, so do interest rates. When the economy is expanding there is a higher demand for credit so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

US Exchange/Trading Platforms Market Share as of 12/26/2009

Platform Market Share

Nasdaq 36.6%

NYSE 26.8

Direct Edge 12.7

BATS 10.0

Dark Pools 9.5

ISE 2.2

Other 2.2

OECD's CLI

OECD - Organisation for Economic Co-operation and Development

CLI - Composite Leading Indicator

* Designed to provide early signals of turning points between expansions & slowdowns of economic activity.

* OECD compiles CLIs for 29 member countries, 6 non-member economies, & 7 country groupings.

* The CLI comprises a set of component series selected from a wide range of key short-term economic indicators to ensure that the indicators will still be suitable when change in economic structures occur in the future.

* A common way to exploit CLI data is to take their YoY growth rate

* Releases are monthly, on the Friday of the first full week of the month, & refer to activity two months earlier (i.e. Jan's release reports leading indicators for Nov)

* The US has its own set of domestic leading economic indicators by the Conference Board, a business research group in NY (i.e. the Index of Leading Economic Indictaors)

Closing Auctions

The official cutoff time for submitting MarketOnClose (MOC) and LimitOnClose (LOC) orders to the NASDAQ closing auction is 3:50pm ET. For the NYSE and NYSE Amex closing auctions, the official cutoff time is 3:45pm ET. For the NYSE Arca closing auction, the official cutoff time is 3:59pm ET. With the exception of orders that are submitted to offset published imbalances, all MOC and LOC orders must be submitted before each market center’s official cutoff time.

Total Return Swaps

A TRS is a financial contract which transfers both the credit risk and market risk of an underlying asset. (It can be categorized as a type of credit derivative).

The protection seller (i.e. the investor) pays the fixed rate (i.e. LIBOR + 40 bps) to receive the return (& risk) of the underlying asset.

The protection buyer (i.e. the broker/dealer) receives the fixed rate & pays the return of the underlying asset (as well as transfers the risk of the underlying asset) to the seller.

Essentially, the protection buyer has "bought protection" by swapping the risky underlying for a fixed rate.

An advantage of a TRS is that one party (i.e. the seller) can derive the economic benefit of owning an asset without actually carrying the asset on its balance sheet while the other party, who does carry the asset on its balance sheet, is protected from loss in the asset's value.

(It is not unlike the scenario where the dealer gives the investor a loan to purchase assets, that are held with the dealer as collateral.)

Hedge funds may use TRS's to obtain leverage on the reference assets (i.e. they can post a smaller amount of collateral upfront than the size of the reference asset.)

The cost of the derivative is determined by the cost to the dealer (i.e. the buyer) of carrying the underlying position (which is made up of the financing charge for acquiring the underlying index position in the cash market, compensation for counterparty risk, dealer profit, & any adjustment for tax related expenses).

So if the cost to the investor (i.e. the seller) is "LIBOR - 40" bps to get long the return of the S&P 500...

We can view it as... The investor is borrowing money at the cost of LIBOR to buy underlying stocks. However, the actual cost is 40 bps less. This "made" 40 bps can be considered "out-performance" offered by the broker/dealer. Perhaps the broker/dealer is able to offer this out-performance due to its actual way of implementing the return (i.e. futures that roll cheap, lending stock inventory, etc.)

Alpha Transport/Portable Alpha

"Portable alpha" refers to separating the active manager’s excess return from the base market return and transporting the alpha to some other market index.

For example, to accomplish this using futures, the investor allocates a pool of capital across three strategies: The majority of the assets are invested with the active manager, a small portion is used to purchase the "other market" index futures, and index futures are sold to eliminate the market return (beta) from the active manager’s total return. The investor is then left with the active manager’s alpha plus passive exposure to the "other market" returns.

Another example for an active bond investment...

Invest in an actively managed fixed income portfolio & keep the exposure to both the fixed income beta and the manager’s alpha. Then use the fixed income portfolio as collateral for a portfolio of futures or swaps that provide equity exposure.

Note that the beta exposure, say through a third-party overlay manager buying futures or executing swaps, may require only a small portion of cash/collateral (for margin). This may allow for a greater portion of the funds to be committed to generating alpha.