To: upanddown who wrote (31612 ) 8/27/1998 12:45:00 PM From: Knighty Tin Respond to
John, We all know about index funds. But many are not aware that most big bank trust departments are now using "overlays." What they do is buy the S&P 500, usually a basket of stocks, though I have seen a few use the Spiders, and use short futures to hedge them using a proprietary timing system (they typically buy high, sell low <G>). Waht they do works something like this. They buy the basket. If the market declines 5%, they short a number of futures. If it goes down further, they short more futures. Then, at the bottom, they are fairly well hedged against making money on the upside. Customers eat this up for several reasons. First, futures are tax-advantaged instruments and commissions are lower. Second, all the long stock attains and then holds on to long term status, as it is never sold. Third, they receive a security blanket as the market heads down. Fourth, at the top when everyone thinks the market is heading higher, they are fully invested.
