Ideosphere Forum

fx-discuss: Re: Your Judge's statement for $CYC

Author: Shawn M. Winnie
Conversation: fx-discuss: Re: Your Judge's statement for $CYC ( prev | next ) reply!
Topic: fx-discuss ( prev | next )
Date: Tue Apr 07, 1998 03:30 pm

Shawn M. Winnie

Neal, thanks for your questions. I'm also posting this response to
the discussion list, as I try not to create information asymmetries
in the claims I judge. ;-)

Neal M Gafter wrote:
> Your characterization of the S&P500 with dividends reinvested as
> the metric for outperformance of conventional funds is unreasonable.
> 90% of the market funds underperform the S&P 500 without the
> reinvestment of dividends. Why should you hold this to a higher
> standard?
The standard is perfectly reasonable, and that is why the S&P500
is used as a benchmark for most general equity performance
measurement. One could argue the appropriateness of reinvestment
of dividends, the traditional distinction being that the cash-back
index is used for single-cycle funds and the reinvest index is used
for evergreen funds. Frankly, I tossed a coin, since there are no
mutual funds or private equity vehicles fitting Michael's description
in my available data set. If Michael's thesis is right, the cash-
back index will tend to outperform the reinvest index.

> Also, I presume the fund need only invest 10-20% of its proceeds
> in start-ups to be considered start-up-hedged. Also, I presume
> a start-up is a stock that has been publicly traded for 2 years
> or less. Can you please clarify these points?
I can't provide a hard-and-fast number for a percentage of assets
in any given asset class. Any fund fitting the bill will have a
prospectus - I'll look at that. (The fundamental problem is
financial leverage. I can short Motorola or I can buy puts on MOT
that are deep in the money. There's more leverage in the puts, so
I might have a fully hedged position with less capital outlay.)
Also, the existence of a public market for a stock is irrelevant to
this claim. If Michael is right, and if history is a reliable guide,
the funds which are likely to prosper will be private equity anyway.
Regardless, the existence of a public market for a young corporate
entity is more a function of macroeconomics and overall market
sentiment than anything inherent in the companies themselves.

My biggest concern is that most funds don't last ten years, let
alone the ten specific years in question. Private equity funds in
the US *tend* to have ten year charters, with two possible one-year
* The "Western Model" is best symbolized not by the mass plebiscite *
* but by the impartial judge. -Fareed Zakaria (ForAff Nov/Dec'97) *


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