The endowments of Harvard, MIT, and Yale all utilize Index ETFs as a part of their investment strategies. In reviewing their 2008 third quarter SEC filings, it was interesting to see a split in their indexing strategies.

Harvard increased its allocations to Emerging Markets, US Small Cap Stocks (IWM), and China (FXI). It decreased its allocation to Brazil (EWZ).

In the breakdown of our current financial system, which many deemed impossible or at least highly improbable, I believe we have witnessed the appearance of a black swan. The term black swan comes from the ancient Western conception that 'all swans are white.’ In that context, a black swan was a metaphor for something that could not exist. (Source: www.wikipedia.org.)

In Nassim Taleb's book The Black Swan: The Impact of the Highly Improbable, he discusses how randomness and uncertainty are much more common than investors would like to admit. In our financial markets, what people perceive to be rare and improbable events do occur. Some examples of these are the stock market crash of 1987, the terrorist attacks on September 11, 2001, and the recent meltdown of our financial system. Yet investors tend to fight the acceptance of this reality. As a result, investors tend to make decisions based on certain assumptions. When markets move outside the realm of these assumptions many are confused, scared and panicked. This is because the reality of investing is much more complicated and unpredictable than many are willing to accept. Opportunities and dangers appear when we least expect them.

In this article I address poor market making in two PowerShare ETFs and how you can protect and correct poor execution.

Last week PowerShares S&P 500 BuyWrite Portfolio (PBP) experienced extremely poor execution on two trades. On Friday September 19^th, 4,000 shares traded at $400 then executed down closer to its NAV price of 24. PBP then traded 929 shares at $300. It then resumed trading closer to its NAV of 24.

According to Morningstar, Q2 inflows into US smallcap equity hedge funds were $757 million. This was a 523.7% increase from Q1 and may help to explain why small (VB) and micro (FDM) caps have outperformed the S&P 500 (SPY) so far this year.  

A Pensions & Investments article entitled “Managers Hungry for Cash Infusion” (Aug 18th) cites that many managers are re-opening their funds to new investors for the first time in years. While most hedge fund categories are experiencing negative inflows, US smallcap is in demand and seems to be viewed as an opportunity by fund-of-funds, pensions, and endowments. The implication is that US smallcap hedge funds may have begun or may begin to put this fresh capital to work. 

Retail investors’ behavior is not reflective of the current global landscape. According to Hewitt Associates’ 401k data for 2007, retail investors were only allocating 14% of their equity portfolios to international investments. This contrasts starkly with the current US portion of global market cap and global GDP. Unlike retail investors, institutional investment activity clearly reflects awareness of the rapid expansion occurring outside the US.

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