A perfect strategy ... ? Yes ...

[Incognitus]

Many here are seeking the holy grail. Now, I believe there IS a strategy that, over the years, can only make money. The only trouble being that it ties up a lot of capital.

It goes like this:
1) Find 10-20 closed end "average" mutual funds. Short them in equal parts.
2) Go long the same amount of underlying in S&P futures. Roll them over as they mature.

Since 80% or more of the mutual funds will underperform the S&P (for many reasons, some of them unavoidable, like costs, commissions, etc) will underperform 2) heavily. That's it.

 

[sprstpd]

Quote from Incognitus:

1) Find 10-20 closed end "average" mutual funds. Short them in equal parts.

How do you short a mutual fund?

 

[Incognitus]

If it's a quoted closed mutual fund, it's a share as anything else.

 

[Avalanche]

Quote from Incognitus:

Many here are seeking the holy grail. Now, I believe there IS a strategy that, over the years, can only make money. The only trouble being that it ties up a lot of capital.

It goes like this:
1) Find 10-20 closed end "average" mutual funds. Short them in equal parts.
2) Go long the same amount of underlying in S&P futures. Roll them over as they mature.

Since 80% or more of the mutual funds will underperform the S&P (for many reasons, some of them unavoidable, like costs, commissions, etc) will underperform 2) heavily. That's it.

I like it, you should find the numbers on closed end fund performance though, they might be a bit better than the overall number because being closed end they should have a better handle on costs/port turnover, etc. and so on, and possibly better overall management than the avg fund.

 

[abogdan]

Quote from Avalanche:

I like it, you should find the numbers on closed end fund performance though, they might be a bit better than the overall number because being closed end they should have a better handle on costs/port turnover, etc. and so on, and possibly better overall management than the avg fund.

Also, a closed end fund typically have a hedge instrument based on the same S&P, but generally, it is a very bright idea, congrats and thank you for sharing it with us.
Cheers,

 

[taigong]

Brilliant idea indeed.

But in practice, should you consider close-end funds' premium/discount factors, which then becomes very quantitative?

Or just KISS, relying on the generally accepted fact that most funds underperform?

tc

 

[daveb351]

CAUTION: Never hold a short on the dividend x-date. You will have to pay it! And since most funds pay monthly...

 

[sprstpd]

Quote from daveb351:

CAUTION: Never hold a short on the dividend x-date. You will have to pay it! And since most funds pay monthly...

The share price will decrease in proportion to the dividend paid?

 

[sammybea]

Quote from Incognitus:

Many here are seeking the holy grail. Now, I believe there IS a strategy that, over the years, can only make money. The only trouble being that it ties up a lot of capital.

It goes like this:
1) Find 10-20 closed end "average" mutual funds. Short them in equal parts.
2) Go long the same amount of underlying in S&P futures. Roll them over as they mature.

Since 80% or more of the mutual funds will underperform the S&P (for many reasons, some of them unavoidable, like costs, commissions, etc) will underperform 2) heavily. That's it.

Great idea.. at least on paper. Thanks for sharing.

 

[daveb351]

Quote from sprstpd:

The share price will decrease in proportion to the dividend paid?

Yes...but you also have to pay the dividend to the person you sold the stock. Rember to sell short, you're borrowing the stock. The original owner is still the "owner of record" and gets the dividend from the company. The person that bought the stock you borrowed is also expecting a dividend! The broker deducts the dividend from your account & pays him. A further complication is with the lower qualified div. tax rate, if you have bought a shorted stock the lower rate doesn't apply...