Alex Trias

ProShares Launches First-Ever 130/30 Strategy ETF (CSM)

There is a notion that one should not just invest in different assets, but also, invest in different ways people pick assets (value, growth, etc). Why? Well, diversification, the answer goes!

Here's the thing. Investor says "I want to diversify, so I'll invest in value style investing, and also in growth style investing." He buys one fund, Value Fund, which owns GE, IBM, and, let's say, Citigroup. Then he buys "Growth Fund" which owns GE, IBM and Citigroup. See the problem? No real diversification at all, so paying Value Fund and Growth Fund to invest in GE, IBM and C costs me money for nothing.

Oh, and here is the other thing. Buying a "strategy" instead of a hard asset, like a stock, or bond, or commodity, just for the sake of diversification can lead to silly results. Picture it. Alex sets up a new ETF, and what this fund does is as follows: Alex will conk himself on the head with a giant banana, and if he passes out, he'll buy Citibank stock. If he doesn't pass out, he'll sell Citibank stock short. He will keep on conking and conking as long as he is able, or until the banana goes rotten and squishy, whichever happens first. To get a slice of this action, Alex charges investors a nice big fat fee. This new "strategy" ETF of Alex's offers returns that have to do with virtually anything at all, no correlation to the Dow Jones or anything else (other than the stupidity of anyone willing to purchase the Alex Banana ETF). Make sense to own the Alex ETF for diversification? I hope not! The rational investor in this example would just buy Citibank, or sell it short, and cut out the Alex middleman entirely. If you don't agree, let me know - I've got a big giant banana just waiting.

Last year should have taught us one big lesson: Invest in assets, not financial engineering and other forms of hot air. If you like hot air, though, then for goodness sake, don't buy it off the shelf at nominally bargain basement prices. The idea that some ETF sponsor is going to eat Goldman Sach's lunch by downmarketing Goldman trading strategies is absurd.

ProShares Pioneering the 130/30 ETF

There should be a difference between investing in a company (or a basket of companies, which is what a traditional ETF is), and investing in a strategy. In the first instance, you buy something tangible, that produces services or goods, and makes money doing it. In the second instance, you're investing in... what, precisely. A statistical relationship, perhaps. An idea. But an idea or statistical relationship is not an asset, it's simply a well-thought out gamble. The fact that the gamble may have worked well for others in the past should be utterly irrelevant to an investor's thinking - that's not just air, it's yesterday's air.
This ETF is an institutionalized gamble - and the sales pitch will be that it offers returns described as being non-correlated with other asset classes. Due to this lack of correlation, the sales pitch goes, it makes sense to own some gambles in your portfolio. The fact that something is not correlated doesn't change the fact that in this case, that something is an institutionalized gamble. Look, imagine Alex is sitting in a room bonking his head with a hammer ever few minutes, with a dealer standing over me promising to pay me X if I can hold up doing this for ten hours, and will pay me zero if I pass out or bleed to death. Next, Alex comes to you and I say "hey investor, I'll give you a piece of this action for a fee, and then you can try to sell this piece of action to other investors, maybe at a profit to yourself." Does the fact that Alex bonking his head with a hammer has no statistical correlation to the Dow Jones, which is true, doesn't mean you want to buy a piece of this action, does it? If so, give me a call, because I have a bridge to sell you, too. If not, you should, like me, consider knock off hedge fund strategies as non-investable. And if you are the type who enjoys investing in stuff like Alex bonking his head with a hammer, for goodness sake, invest in a real hedge fund run by professional head-bonkers who are the best of the best.