Recent Research: Highlights from August 2010

“Celebrating 10 Years of ETFs in Europe.” The Journal of Index Investing (Summer 2010). Deborah Fuhr, Shane Kelly.

This article is a comprehensive report on the history and outlook for the exchange-traded fund industry in Europe. It covers both ETFs and exchange-traded products (ETPs). ETFs are open-end index funds that provide daily portfolio transparency, are listed and traded on exchanges like stocks on a secondary basis, and utilize a unique creation and redemption process for primary transactions. ETPs are products that have similarities to ETFs in the way they trade and settle, but they do not use a mutual fund structure. The use by ETPs of other structures, including grantor trusts, partnerships, notes, and commodity pools, can create different tax and regulatory implications for investors when compared to ETFs.

“Active Portfolio Management and Positive Alphas: Fact or Fantasy?” The Journal of Portfolio Management (Summer 2010). Robert A. Jarrow.

It is commonly believed that active portfolio management can generate positive alphas. This is partly based on the belief that positive alphas represent disequilibrium returns, which can exist in complex financial markets. In contradiction, this article shows that positive alphas represent arbitrage opportunities, not just disequilibrium returns. As persistent and frequent arbitrage opportunities are much rarer, even in complex markets, Jarrow argues that positive alphas are more fantasy than fact. He introduces the notion of an unobservable factor that can generate false positive alphas, and which resolves the inconsistency between common belief and the sparsity of positive alphas.

“Examining the Use of Investment Policy Statements.” The Journal of Wealth Management (Fall 2010). Steve P. Fraser, William W. Jennings.

Using a sample of Investment Policy Statements from college and university endowments, the authors examine the form and use of these important documents. Direct examination of the IPS reveals subtleties that surveys may obscure. In addition to providing statistical insights into endowment management, the authors extract what they view as best practices from the Investment Policy Statements themselves. This study provides valuable insights for individual and institutional investors and their advisors.

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