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Hedge Fund Shenanigans Uncovered by the SEC

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by Mark Hebner and IFA Contributors
Tuesday, September 30, 2014

While perusing the Wall Street Journal, we came across an article1 (“SEC Criticizes Hedge Funds”) that caught our attention. The Securities and Exchange Commission (SEC) recently completed examinations of 185 hedge fund firms and found deficiencies such as firms ...Read More

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  • The Bond King Leaves PIMCO for Janus Capital

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    by Mark Hebner and IFA Contributors — Monday, September 29, 2014

    We were as shocked as everyone else when we learned that Bill Gross had resigned from PIMCO, and we were doubly shocked to learn that he was going to Janus Capital, a company not known for its bond funds. In prior articles such as this one, we have discussed ...Read More

  • Is Indexing the End of Capitalism? We Don't Think So!

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    by Mark Hebner and IFA Contributors — Thursday, September 25, 2014

    Political commentator Jonathan Russo wrote an interesting article on Huffingtonpost.com called “Indexing and the End of Capitalism.” Although it had a great start by noting the arrival of the tipping point for passive over active, it unfortunately went downhill from ...Read More

  • Marlena Lee

    How Much Income Do You Need in Retirement?

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    by Marlena Lee — Wednesday, September 24, 2014

    The answer, of course, is different for every person. In the video, Marlena Lee of Dimensional Fund Advisors explains how someone who is close to retirement can arrive at a reasonable estimate of what they will need in ...Read More

  • Frontier Markets—Tread Carefully Says FINRA

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    by Mark Hebner and IFA Contributors — Monday, September 22, 2014

    The frontier markets consist of developing countries that have not yet made it to or have dropped out of the category of emerging markets. Some examples would be Argentina, Lebanon, Nigeria, Slovenia, and Vietnam. If these names conjure up images of hyperinflation, debt default, ...Read More

  • Pension-Gate: Some Good News from CalPERS

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    by Mark Hebner and IFA Contributors — Thursday, September 18, 2014

    According to this press release, the $300 billion California Public Employees’ Retirement System (CalPERS) will eliminate its hedge fund program which currently consists of $4 billion spread over 24 hedge funds and six hedge fund-of-funds. For the fiscal year ending ...Read More

  • The Nature of Capital and Income: A New Addition to IFA's Library

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    by Mark Hebner and IFA Contributors — Wednesday, September 17, 2014

    According to Joseph Schumpeter, the father of “creative destruction,” Professor Irving Fisher of Yale University was the greatest economist the United States ever produced.1 James Tobin, another Yale Professor of Economics and 1981 Nobel laureate called2 Fisher ...Read More

  • The Curse of the Five-Star Rating

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    by Mark Hebner and IFA Contributors — Tuesday, September 16, 2014

    A recent Wall Street Journal article (“Mutual Funds’ Five-Star Curse”, 9/8/2014) should give pause to investors who only pick managers with the coveted five-star rating from Morningstar. As we have pointed out on many occasions, above average performance (which ...Read More

  • IFA's Ever-Expanding Hedge Fund Manager Hall of Shame

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    by Mark Hebner and IFA Contributors — Monday, September 15, 2014

    Last year, Index Fund Advisors inaugurated its Hedge Fund Manager Hall of Shame. Since then, quite a bit has happened with what Forbes called The Sleaziest Show on Earth. On September 8th, Mathew Martoma of Steven A. Cohen’s SAC Capital (now called Point72 Asset Management ...Read More

  • Do Target-Date Investors Behave Better in Times of Market Turmoil?

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    by Mark Hebner and IFA Contributors — Friday, September 12, 2014

    Due to the auto-enrollment requirements of the Pension Protection Act of 2006, target-date funds have gained significantly in popularity in recent years. To gain the full benefit offered by a target-date fund, investors (or participants in defined contribution retirement plans) ...Read More

  • Q&A with IFA: ETFs vs. Tax-Managed Funds

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    by Mark Hebner and IFA Contributors — Thursday, September 11, 2014

    Question: I have heard that exchange-traded funds (ETFs) are more tax-efficient (have lower tax costs) than index mutual funds. For a taxable account, should I prefer to hold ETFs? Answer: There is a widely held belief among investors that exchange-traded funds (ETFs) are ...Read More

  • Two More Hedge Funds Bite the Dust

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    by Mark Hebner and IFA Contributors — Tuesday, September 9, 2014

    In a recent Wall Street Journal article1, we learned of the closing of Rinehart Capital Partners LLC which specialized in emerging markets stock picking. Interestingly, the manager (Andrew Cunagin) blamed high-frequency trading (HFT) for the shutdown: “This is a circus ...Read More

  • The Glide Path

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    by Mark Hebner — Monday, September 8, 2014

    IFA recommends a Glide Path strategy for all clients. This strategy reduces one index portfolio per year (1% less in asset allocation to stock indexes), based on the 100 Index Portfolio ...Read More

  • A Look Back at a Classic (and Prescient) Investment Speech

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    by Mark Hebner and IFA Contributors — Monday, September 8, 2014

    “Trying Too Hard” is the title of the 1981 keynote speech delivered by Dean Williams of Batterymarch Financial Management to the Financial Analysts Federation Seminar. Unlike most other investment speeches whose age is measured in decades, this one is 100% relevant ...Read More

  • Help Wanted: Stock Pickers Need Not Apply

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    by Mary Brunson, Vice President — Friday, September 5, 2014

    “The debate about whether you should hire an “active” fund manager who tries to beat the market by buying the best stocks and avoiding the worst — or a “passive” index fund that simply matches the market by holding all the stocks — is ...Read More

  • CAPE Fear: Valuation Ratios and Market Timing

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    by Weston Wellington — Friday, September 5, 2014

    As broad market indices such as the S&P 500 have set new record highs in recent weeks, many investors have become apprehensive. They fear another major decline is likely to occur and are eager to find strategies that promise to avoid the pain of an extended downturn while ...Read More

  • It's the Disclosure, Stupid!

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    by Mark Hebner and IFA Contributors — Friday, September 5, 2014

    In  perusing today’s press releases (9/2/2014) from the Securities and Exchange Commission (SEC), we received a reminder of the fact that just because a registered investment adviser has a fiduciary duty to act in the best interests of its clients does not mean that ...Read More

  • A Textbook Case of Insider Trading

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    by Mark Hebner and IFA Contributors — Thursday, September 4, 2014

    When we hear about someone being charged with insider trading, the first thought that usually comes to mind is that of company executives or hedge fund sharpies that illegally profited from their access to private information like the folks portrayed in this insider trading ...Read More

  • Q&A with IFA: Is There Any Type of Market Where Active Management Shines?

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    by Mark Hebner and IFA Contributors — Wednesday, September 3, 2014

    Question: Does Passive management make sense in all market conditions? Note: The question above was originally addressed in DFA’s Fama/French Forum. Professors Fama and French began their response with William Sharpe’s conclusion that the average active dollar must ...Read More

  • Q&A with IFA: Do Fundamentals Tell Us When Stocks Are Overpriced?

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    by Mark Hebner and IFA Contributors — Tuesday, September 2, 2014

    Question: In their book Valuing Wall Street published in early 2000, Andrew Smithers and Stephen Wright claim that the Q ratio popularized by Nobel laureate James Tobin reliably identifies periods of extreme overvaluation and undervaluation in stock prices. ...Read More

  • The S&P 500 Index Closes Above 2,000 and So What?

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    by Mark Hebner and IFA Contributors — Friday, August 29, 2014

    On August 26th, 2014, the S&P 500 Index closed above 2,000 for the first time by the skin of its teeth (2,000.02). To us at Index Fund Advisors, it is just a number and nothing to get excited about. We are reminded of what one of our favorite authors ...Read More

  • Q&A with IFA: Do Index Funds Contribute to Mispricing?

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    by Mark Hebner — Friday, August 29, 2014

    Question: Index funds buy stocks "blind" without regard to company fundamentals. Do their activities contribute to mispricing of securities? Note: The question above was originally addressed in DFA’s Fama/French Forum. Professor Fama gave his typical terse but to the ...Read More

  • Q&A with IFA: Unwinding a Large Stock Position

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    by Mark Hebner — Thursday, August 28, 2014

    Question: I hold a large stock position in the company that I used to work for. Can IFA help me unwind that position so that I can invest the proceeds into a diversified portfolio? Answer: In the past, we have helped many clients liquidate large stock positions which resulted ...Read More

  • International Bond Investing: To Hedge or Not to Hedge Currency Risk?

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    by Mark Hebner and IFA Contributors — Wednesday, August 27, 2014

    As with international equities, bonds issued in foreign currencies constitute more than half of the taxable bond market, and adding international bonds to a U.S.-only portfolio provides a diversification benefit that results from exposure to the yield curves and the economic ...Read More

  • Tough Times Continue for Stock Picking Fund Managers

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    by Mark Hebner and IFA Contributors — Tuesday, August 26, 2014

    In two recent Wall Street Journal articles1, Kirsten Grind detailed the continuing ascent of passive funds over active funds. Her first article began by noting Vanguard’s record in-flows which have brought its assets under management to almost $3 trillion. She partly ...Read More

  • Vanguard Quantifies the Impact of Performance-Chasing

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    by Mark Hebner and IFA Contributors — Monday, August 25, 2014

    For many years now, IFA has called attention to the dismal performance of individual investors. The chart below shows the results of the DALBAR study which details how the average individual fund investor has severely lagged the S&P 500 Index. Insert most recent DALBAR chart ...Read More

  • Q&A with IFA: Reducing Risk with Options

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    by Mark Hebner and IFA Contributors — Friday, August 22, 2014

    Question: Can put or call options be used to achieve a more predictable risk-return tradeoff? For example, should I purchase put options to minimize equity portfolio losses? Note: The question above was originally addressed in DFA’s Fama/French Forum. They gave the ...Read More

  • Reaching for Yield—Non-Traditional Bond Funds

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    by Mark Hebner and IFA Contributors — Monday, August 18, 2014

    In late 2011, a few years after the beginning of the current era of very low interest rates, Morningstar launched the non-traditional-bond category. According to Morningstar’s Eric Jacobson, this category includes funds that pursue strategies that diverge in some way from ...Read More

  • Active vs. Passive—Have We Tipped Over the Tipping Point?

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    by Mark Hebner and IFA Contributors — Friday, August 15, 2014

    Regarding this question, a recent article on Morningstar.com caught our attention. John Rekenthaler, a Vice President of Research at Morningstar, questions whether active funds have a future in light of recent cash flow data. As the chart on the left-hand side below shows, for ...Read More

  • Pension-Gate: Some Good News and Bad News

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    by Mark Hebner and IFA Contributors — Thursday, August 14, 2014

    The recent good news from the Wall Street Journal (summarized here) is that the California Public Employees’ Retirement System (CALPERS) is planning to drop the level of its hedge fund investments this year by 40% to $3 billion. This retreat comes in the aftermath of many ...Read More

  • Fidelity Agrees to Settle 401(k) Lawsuits

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    by Mark Hebner and IFA Contributors — Thursday, August 14, 2014

    A little less than a year ago, we published this article about Fidelity facing a class action lawsuit by its employees alleging that the firm put them into costly proprietary funds in the firm’s profit-sharing plan, even though cheaper options were available. One of the ...Read More

  • Invest Like a Hedge Fund? Thanks but No Thanks!

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    The Wall Street Journal recently featured an article, How Individual Investors Can Invest Like a Hedge Fund, that caught our attention. In light of recent poor performance which we have documented here and here, it is simply beyond us why anybody would want to emulate hedge ...Read More

  • State Pension Plans - A Deeper Look at Performance

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    Index Fund Advisors expended a large amount of time and effort in putting together the data that reveals the failure of active management for state pension systems. As of now, there is no central repository of information on state pension performance, so each state’s ...Read More

  • Quantifying the Value of Tax Loss Harvesting

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    by Tom Allen and Mark Hebner — Tuesday, August 5, 2014

    Tax loss harvesting is one service provided by most financial advisory firms and is one of the hardest to quantify in terms of value added. The professional opinion on this topic ranges from the “do it every chance you get” to the “never, ever.” At Index ...Read More

  • Weston Wellington on Dimensional's Philosophy

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    by Weston Wellington — Tuesday, August 5, 2014

    Weston Wellington, Vice President of Dimensional Fund Advisors, explains how he came to embrace Dimensional's scientific approach to investing. Weston explains how the ideas discussed at Dimensional had almost a "gravitational pull" on him... "sort of like a Black Hole ...Read More

  • The Active vs. Passive Debate Plays Out on MarketWatch

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    by Mark Hebner and IFA Contributors — Tuesday, August 5, 2014

    Those of us who are old enough to have watched 60 Minutes in the 1970s will undoubtedly remember the Point/Counterpoint segment which featured liberal and conservative spokesmen debating hot button issues of the day. Even more unforgettable was the Saturday Night Live parody ...Read More

  • FINRA Takes a Step in the Right Direction

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    by Mark Hebner and IFA Contributors — Monday, August 4, 2014

    A few months ago, we published an article about the problem of brokerage clients not being able to rely on information about their broker in FINRA’s BrokerCheck because of the ease with which brokers can expunge records of arbitration claims made against them. Today, we ...Read More

  • DFA Wins Another Survey of Financial Advisors

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    by Mark Hebner and IFA Contributors — Friday, August 1, 2014

    Market Strategies International just released its 2014 annual Advisor Brandscape report from its Cogent Reports Division™, and once again, Dimensional Fund Advisors (DFA) came out on top. The survey of 1,437 financial advisers was conducted online from February to April of ...Read More

  • Mark Hebner and IFA Contributors

    Some Discouraging Results from Gallup

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    by Mark Hebner and IFA Contributors — Thursday, July 31, 2014

    A few months ago, Gallup, Inc. conducted a poll that asked 1,026 Americans to choose the best option for their long-term investments. Here is how they answered: Real Estate          ...Read More

  • Active vs. Passive — A Look at Pensions in the U.K.

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    by Mark Hebner and IFA Contributors — Wednesday, July 30, 2014

    In the past month, we have published two articles on the state of investment management in the U.K. In that regard, we found another video from our friends over at Sensible Investing that puts yet another nail into the coffin of active management. The video is ...Read More

  • Some Interesting Data from the 2014 Investment Company Fact Book

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    by Mark Hebner and IFA Contributors — Monday, July 28, 2014

    The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs). Members of ICI manage total assets of $17.1 trillion and serve more ...Read More

  • Does Past Performance Matter? The View from S&P Dow Jones Indices

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    by Mark Hebner and IFA Contributors — Monday, July 28, 2014

    S&P Dow Jones Indices recently released the latest version of its Persistence Scorecard. Any investor who chooses a fund manager based on performance relative to peers should thoroughly study this report. As with all the previous versions of the report, it showed a lower ...Read More

  • IFA's Performance Monitoring Report vs. the fi360 Fiduciary Score

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    by Mark Hebner and IFA Contributors — Wednesday, July 23, 2014

    For the purpose of the quarterly monitoring of the funds that IFA advises for use by both our individual and institutional clients (including 401(k) plan sponsors), IFA has chosen to use its own proprietary scoring system rather than the widely used fi360 Fiduciary Score. Below ...Read More

  • Risk Savvy—How to Make Good Decisions

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    by IFA Contributors — Tuesday, July 22, 2014

    A New Book by Gerd Gigerenzer Innumeracy is a word coined by cognitive scientist Douglas R. Hofstadter in the early 1980s to describe a lack of basic mathematical ability as it applies to everyday life. Later that decade, mathematician John Allen Paulos published a book of that ...Read More

  • Q&A with IFA: Market Timing with Moving Averages

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    by Mark Hebner and IFA Contributors — Friday, July 18, 2014

    Question: Some researchers argue that a market timing strategy based on buy/sell signals generated by a 50- or 200-day moving average offers a more appealing combination of risk and return than a buy-and-hold approach. What is your view? Note: The question above was originally ...Read More

  • Understanding Equity-Indexed Annuities

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    by Mark Hebner and IFA Contributors — Thursday, July 17, 2014

    Recently, a client asked us about potentially buying an equity-indexed annuity (EIA). Not to be confused with a variable annuity, an EIA is not held in a segregated account exclusively for the policyholder’s benefit. Instead, it is backed by the general reserves of the ...Read More

  • IFA's Use of Tax-Managed Funds

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    by Mark Hebner and IFA Contributors — Wednesday, July 16, 2014

    For investors with taxable accounts, IFA has long advised the use of tax-managed funds for the purpose of maximizing after-tax returns. Please note that this is not the same goal as minimizing taxes. The five tax-managed funds that IFA advises for our clients each cover a ...Read More

  • The IRS Addresses Longevity Risk in Retirement Plan Accounts

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    by Mark Hebner and IFA Contributors — Friday, July 11, 2014

    In our summary of risks facing retirees, we identified longevity (the potential to outlive one’s assets) as one that has increased through time with medical advances leading to ever-longer life-expectancies. One way of mitigating this risk is through the purchase of an ...Read More

  • Active vs. Passive in the U.K.—A Follow-up

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    by Mark Hebner and IFA Contributors — Thursday, July 10, 2014

    A few weeks ago, we published this article about the dismal performance of active managers in the U.K. We saw that only 1% of them were found to reliably beat a risk-adjusted benchmark, but even for that 1%, the managers extract the whole of this superior performance for ...Read More

  • Transfer on Death and Retirement Account Beneficiaries

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    by Mark Hebner and IFA Contributors — Wednesday, July 2, 2014

    As you are probably aware, if you have an IRA, 401(k), or other type of retirement account, you must have a designated beneficiary(s). Normally, you will have a primary beneficiary as well as a contingent beneficiary in the event that both you and your primary beneficiary perish ...Read More

  • With the Market at New Highs, How Should You Prepare for the Bear?

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    by Mark Hebner and IFA Contributors — Wednesday, July 2, 2014

    As of today (July 2nd, 2014), the Dow and the S&P 500 Index are flirting with new highs of 17,000 and 2,000, respectively. Both have come a long way from their low points of March 9th, 2009 (6,547 for the Dow and 677 for the S&P 500). While all ...Read More

  • The Second Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Tuesday, July 1, 2014

    In the second quarter of 2014, market risk was rewarded around the world, particularly for emerging markets and real estate. Portfolios tilted towards small cap companies were not rewarded to the same extent as portfolios tilted towards large caps companies. On June 18th, the ...Read More

  • Q&A with IFA: Prediction in Valuations

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    by Mark Hebner and IFA Contributors — Monday, June 30, 2014

    Question: Do valuation measures such as price-to-earnings or price-to-dividend ratios help predict future returns? Are they telling us anything now? Note: The question above was originally addressed in DFA’s Fama/French Forumon December 11th, 2008, in the midst of the ...Read More

  • Q&A with IFA: Front Running and Fair Pricing

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    by Mark Hebner and IFA Contributors — Monday, June 23, 2014

    Question: What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis? Note: The question above was taken from DFA’s Fama/French Forum. Here is their response: “First, if front running is profitable, there must be ...Read More

  • Passive vs. Active—the View from Across the Pond

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    by Mark Hebner and IFA Contributors — Monday, June 23, 2014

    While perusing the Daily Telegraph, one of our Wealth Advisors came across this article that highlights the bloody awful results delivered by active managers in the U.K. Reporter Richard Evans cites Professor David Blake, one of the authors of this study  of 516 funds ...Read More

  • Mark Hebner and IFA Contributors

    Lord Abbett Funds: A Deeper Look at Their Performance

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    by Mark Hebner and IFA Contributors — Friday, June 20, 2014

    On a few occasions, we have been asked by prospective clients about Lord Abbett funds. Like American Funds, they have been around since the Great Depression and are fully dedicated to active management. As of 12/31/2013, they had $137 billion1 of assets under management spread ...Read More

  • Q&A with IFA: Do Low-Volatility Strategies Produce High Returns

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    by Mark Hebner and IFA Contributors — Friday, June 20, 2014

    Question: Certain researchers have reported1 that low-volatility stocks in the U.S. outperform high-volatility stocks and attribute this apparent anomaly to investor behavioral biases as well as limits to arbitrage. What do you make of their argument? Note: The question above ...Read More