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Of pretentious hedge fund names and bad results James Saft


You probably already knew that hedge fund names are intended to impress, or even better to confuse just enough to make you stop asking questions, but most of all to inspire confidence. You are, after all, as a hedge fund client, about to hand over a substantial sum to people whose probity and ability you cannot measure. Fund names must set the right tone, engender the right mood. So we have the proliferation of funds with names intending to suggest ritzy addresses or locales, abstruse theorems and admirable but all-too-rare personal characteristics. “The Chappaquiddick Binomial Integrity Fund II” is one you can have for free if you are thinking of starting a hedge fund. What we now know, thanks to a nifty new study, is that hedge fund names which sound dignified are sending a signal through all the noise of marketing, and it is not the one the marketing consultants intend. Funds named with words which suggest gravitas, that solemnity and dignity the Romans thought essential to leadership, attract more investor flows and perform worse, according to the study. (here)“Hedge fund investors chase hedge fund names containing a special combination of words related to economics and geopolitics, or that convey power,” Juha Joenväärä of Finland’s University of Oulu and Cristian Ioan Tiu of the University at Buffalo write in the study.“Having a name with gravitas is associated with abnormal negative performance.”Using the Harvard IV psychological dictionary the study devises a weighting scheme to measure funds whose names suggest attributes and subjects including politics, economics, power and influence, a category they term gravitas, looking at a sample of almost 18,000 hedge funds from 1994 to 2013.

The funny part is, it works: every one word with gravitas increases the flow into an average fund by $227,120 a year. The even funnier part, it backfires: funds with positive gravitas exposure in their names underperform those with negative gravitas by almost 1 percent of alpha, or outperformance, a year. Average annualized returns are 0.82 percentage point lower, volatility is higher and average maximum losses in a given period are higher. These dignified funds are worse in almost all of the important ways you can measure, it seems. A CONFIDENCE GAME

The study suggests that the so-called sophisticated investors who put money into gravitas hedge funds do learn, eventually reversing their flows of cash into them. They learn so well that the gravitas funds are more likely than other funds to ultimately fail, though perhaps what is being measured here is not investor learning but that managers without much talent are more likely to try to hide behind confidence-inspiring fund names. The probability of going out of business of funds with the highest level of gravitas is more than 5 percent higher than those whose names have no gravitas. Interestingly the gravitas funds have higher management fees and lower incentive fees. A management fee the manager gets to keep no matter what, while a performance fee only kicks in if pre-agreed hurdles are jumped. It is almost as if these guys know they are not that good. Similar studies, with similar results, have been done about mutual funds, but mutual funds market to the great ignorant mass of investors, not the supposedly sophisticated hedge fund client base, most of whom are institutions.

Will Republicans fund tax cuts by tapping retirement piggy bank? CHICAGO Tax reform is up next for our Attention Deficit Disorder Republican government, which just rushed through a chaotic, ugly battle to reform our complex healthcare system. The fight over tax reform promises to be just as chaotic and ugly - and it could mean big changes for Americans saving for retirement.

Investors want advice from both robots and humans: study NEW YORK Financial advisers across Wall Street's biggest brokerages have fretted over their professional futures in recent years as their firms worked to develop "robo" services for millennial and tech-savvy clients.

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Wall Street braces for rough ride as exchanges seek more speed bumps


U.S. stock exchanges that spent decades speeding up markets with cutting-edge technology are now rushing to slow them down. The New York Stock Exchange, Chicago Stock Exchange and Nasdaq Inc (NDAQ. O) are all awaiting decisions by the U.S. Securities and Exchange Commission on whether they can delay trades through so-called "speed bumps" and new order types. The SEC is expected to approve or reject their proposals in the coming weeks. The about-face comes after advances in technology made it possible to complete trades almost at the speed of light, prompting concerns by some market participants that sophisticated high-frequency traders were eating the lunch of ordinary investors. Exchanges have profited from selling specialized services to high-frequency traders, which make up more than half of U.S. trading volume. But now they are looking at ways to attract a wider range of investors, at least to certain of their trading venues, or are making sure they are keeping up with each other. The SEC approved the market's first speed bump last year, but rules around intentionally slowing down trades are vague and it is difficult to predict which, if any, of the proposals will pass. SEC staff are scrutinizing how each exchange justifies its plans, said a person familiar with the matter."Whenever you have something that applies to one group and not others, it's discriminatory in some sense," said the person, who asked for anonymity as they are not authorized to speak to the media. "The question is, can you justify the discrimination?"The proposals follow the launch of IEX Group, which burst onto the scene last August with the market's inaugural speed bump and other features they said would level the playing field and protect small investors from high-speed trading chicanery. Other exchanges were some of IEX's fiercest opponents and there is still a heated debate about whether the upstart is as altruistic as it was portrayed in Michael Lewis's best-selling book "Flash Boys: A Wall Street Revolt." However, its new way of doing business ultimately forced rivals to rethink their own strategies.

Exchanges' reputations hinge on their ability to execute orders quickly and seamlessly for brokers, which are required to get customers the best market prices. Lewis's book scandalized Wall Street with its claim that exchanges were rigging the market by allowing high-frequency traders to use their speed to effectively jump the queue of orders from ordinary investors, known in the industry as "latency arbitrage." Many on Wall Street dispute that such a thing exists. Nevertheless, high-frequency trading firms pay exchanges huge sums for near light-speed market access and data to drive their algorithms, and have become an increasingly large player in the stock market over the past decade. IEX ran counter to the trend by establishing an exchange that does not make speed the primary factor and does not sell things like access to microwave and laser data feeds that give ultra-fast traders an edge. The approach appealed to many customers, including several institutional investors, and the exchange now has 2 percent of the U.S. stock-trading market. (Graphic: tmsnrt.rs/2mJMuor) Most traditional exchanges initially opposed IEX's speed-bump proposal, but have since had a change of heart, since it has become clear that some investors want to see such change.

"The SEC, by approving IEX's exchange application, has opened up the marketplace for the potential for innovation around market structure that really has not been available to us for the last almost 10 years," said Nasdaq Chief Executive Adena Friedman. UN-AMERICAN? In giving IEX the green light, the SEC said exchanges could pause trades for up to a millisecond, as long as the delays were not unfairly discriminatory or anti-competitive. The NYSE, which is owned by Intercontinental Exchange Inc (ICE. N), essentially wants to copy IEX's speed bump, as well as an order type the startup pioneered. NYSE argues that while it previously said the model was bad for the market, some institutional investors prefer it and NYSE should be allowed to offer them the choice. NYSE, whose chairman once called IEX "un-American," also plans to rename its proposed speed-bump exchange NYSE American from NYSE MKT. NYSE's main New York Stock Exchange market would remain unchanged.

In contrast, the Chicago Stock Exchange put forward a speed-bump plan that some brokers can bypass if they meet strict requirements to provide quotes for others. In doing so, it hopes to create more liquidity. Rather than a speed bump, Nasdaq wants to introduce an "extended life" order type. It would apply only to orders generated by regular, mom-and-pop investors, who tend to be less informed and therefore coveted by professional traders. The orders would sit exposed for at least a second and then jump ahead of other investors to get filled. Wall Street lacks consensus on whether the proposed delays are a good idea. Some high-frequency trading firms have asked the SEC to deny the proposals, arguing that various time lags across 13 exchanges would make it difficult to know the true price of a stock at any given time. For its part, IEX has asked the SEC to reject NYSE's proposal. In an interview, Chief Market Policy Officer John Ramsay characterized some rivals' plans as disingenuous."The speed bump is just one piece of our market design and it's designed to work with all of the other pieces in tandem,” said John Ramsay, IEX's Chief Market Policy Officer. Others support the new developments."The only one this impacts is the guy whose business model is to rely on speed in somewhat, I would argue, a pernicious manner," Doug Cifu, CEO of trading firm Virtu Financial Inc