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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: accountclosed who wrote (35497)	11/7/1998 11:36:00 AM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

AR, There are no funds doing the type and variety of trades that I do. Historically, the main reason is that equity option income funds have performed very poorly over time. Some of this has to do with the fact that most of the portfolio managers and/or the management cos. didn't know what they were doing. They were Black-Scholes geeks who bought high and sold low, for the most part. They also sold short term options against their long stock, which is just stupid as a regular policy. However, a bigger reason for their demise is that the infamous short short rule of the IRS sent the option income manager into the fight with both hands tied behind his back. Without going into a lot of detail, the short short rule, which I fought for a decade with zero success, severely limited realizing capital gains in mutual funds. The good news now is that it was repealed earlier this year. The bad news is that the fund cos. are making so much money selling momentum geek funds that they didn't notice. In point of fact, they only tend to create hedged equity funds at market bottoms. Off your question, the 90/10 funds failed for the same reasons. The Treasury securities options/futures funds suffered a similar fate. The short short rule was certainly a factor, but the main boogie man was the fact that the fund cos. and managers didn't realize that they could not always stay long the long bond. They had to lower maturities before a rise in rates. Or, they simply misjudged rates. Or, both. This, btw, is what caused me to leave American Capital. This is a bunch of personal bs, so I won't be offended if you skip it. In 1986, when long bond rates hit 7 1/4 pct., I lowered the avg. maturity on my fund from 27 years to 6 1/2 years, and stated that I was heading for 3 years as soon as the short short rule would allow me to get there. Obviously, short term Treasury notes yield less and short term Treasury note options carry less premium. Our competition was still at the long end. The result was that my strategy dropped us to the SECOND highest yielding fund in the country. I argued that this was temporary and that we would go long after the bond crashed. The marketing dept. argued that I was killing them by reducing the payout. They were only selling $5 million a day of the fund, when they had been selling $30 million a day. This is the same marketing dept. that was selling less than $4 million a day in all the cos funds before I arrived, and who wanted me to take less risk when the long bond was at 14 pct. The bosses sided with the salesmen and I resigned in protest. Rates climbed to nearly 10 pct and the fund, which had grown from zero to $10 Billion in assets under my management, is sitting at $1.8 billion today. And the Marketing Department would kill for anything that sold $5 million a day. -g- Now, off the personal crap. Another reason nobody does what I do is that they restrict themselves. Equity funds do equities. Bond funds do bonds. Market Neutral funds do paired trades. The concept of doing everything with a fund that also uses options, futures, paired trades, short sales, etc. would scare the empty suits who believe in indexing uber alles. MB