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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: redfrecknj who wrote (62173)	5/30/2006 2:36:47 AM
From: Taikun	Read Replies (1) \| Respond to of 110194

There are already funds like that in Canada where you can 'double up' or 'double down' on bonds, USD, gold, oil, S&P: hbpfunds.com

To: redfrecknj who wrote (62173)	5/31/2006 3:14:05 AM
From: shades	Respond to of 110194

Swedroe on Leverage: socialize.morningstar.com 5. from article on leverage wrote while back larry swedroe\| 05-28-06 \| 09:00 AM A good example of a mutual fund that uses leverage is the Rydex Nova Fund. The fund, from the Rydex family of mutual funds, is a no-load fund designed to provide investment returns that correspond to 150 percent of the performance of the S&P 500 Index. The fund uses borrowed funds (margin) to increase its exposure to the Index to 150%of the assets invested in the fund. The fund achieves its target beta (exposure to the price change in the Index) of 1.5, through the purchase of shares of individual securities, stock index futures contracts, and options on securities and stock indexes. The question for investors is: Does the fund deliver on its premise? The Rydex Nova fund began its life in 1994. For the nine-year period 1994-2002 the S&P 500 Index provided an annualized return of 9.26%.If the Nova fund were able to deliver 150% of the returns of its benchmark index it would have provided investors with an annualized return of 13.89%. Instead of returning 150%, Rydex Nova earned just 46.9% of its goal, and a shocking 30% less than the S&P 500 Index itself. Not only did investors in Rydex Nova earn 30% lower returns, the use of leverage caused the standard deviation of the fund to be 31.56% vs. just 22% for the S&P 500 Index. Thus the fund returned 30% less while taking investors for a ride that was 43.5%more volatile.The following table shows the results of the last four calendar years, 1999-2002. The term alpha in the table compares the returns realized by investors in the fund against the targeted benchmark of 150% of the performance of the S&P 500 Index. A negative alpha would indicate a shortfall. 1999 (%)2000 (%)2001 (%)2002 (%) Rydex Nova (A) 24.0 -19.6 -22.2 -35.1 S&P 500 Index (B)21.0 -9.1 -11.9 -22.1 150%S&P 500 (C) 31.5 -13.7 -17.9 -33.2 Alpha (A-C) -7.5 -5.9 -4.3 -1.9 Let's look at the various factors that contributed to the dramatic shortfall. The first factor is that the fund carries a high expense ratio of 1.16%. This is about 1% more than that of the lowest cost alternatives such as an ETF or an index fund. Greater expenses lead to lower net returns.The second factor is that margin is not free. When you borrow money to increase your exposure to the market, you have to pay the lender a spread over its cost of capital. The borrowing costs add to the hurdle of operating expenses, further reducing the net returns available to investors. If options were used to increase exposure, then the option premium must be paid, again negatively impacting returns. The third factor is that volatility creates a sort of black magic we might call decompounding. The greater the volatility, the larger the difference there will be between the average annual return of an investment and its compound, or annualized, rate of return. Let's now look at the impact of volatility on the returns of the S&P 500 Index and the Rydex Nova Fund. The annual return of the S&P 500 Index was 11.3% percent. Volatility of 22% per annum reduced the annual return to an annualized return realized by investors of 9.26%. Realized returns were 81.9% of the annual return-volatility destroyed 18.1% of returns. The annual return of the Rydex Nova Fund was 10.83% percent (note that even the annual return of this fund was lower than the annual return of the S&P 500 Index). Volatility of 31.56% per annum reduced the annual return to a return realized by investors of 6.52%. Realized returns were just 60.2% of the annual return-volatility destroyed almost 40% of returns