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Recent Research: Highlights from December 2010

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An Empirical Investigation of the Performance of Commodity-Based Leveraged ETFs.” The Journal of Index Investing (Winter 2010). Robert Murphy.

The authors investigate the ability of 12 commodity-based leveraged ETFs in the ProShares family to achieve their stated investment objectives.They find that these 12 ETFs generate average daily returns that are not statistically significantly different from their stated objectives.They also find evidence that over their entire lives these ETFs generally underperform expectations when considering their exposure (long vs. short), desired leverage, and expense ratios. Despite this general underperformance relative to expectations, the authors also find that roughly 1/3 of the ETFs outperform expectations. They also report that over their entire lives the 12 leveraged ETFs in their sample struggle mightily to beat the performance of their corresponding unlevered commodities or indices. Their general inability to beat their corresponding unlevered commodities or indices over the long run is demonstrated to be a function of the price volatility of the commodities and indices. The authors conclude that these commodity-based leveraged ETFs are effective ways to gain double and double inverse exposure to the corresponding commodities and indices on a daily basis.However, they advise against using these ETFs in any sort of buy-and-hold investment program.


Methods of Valuation: Myths vs. Reality. ” The Journal of Investing (Winter 2010). Stanley Block.

The author takes the position that too many entering the profession of finance are incorrectly trained in valuation methods. The price/earnings multiple dominates the investments material, while EV/EBITDA goes largely ignored. In this survey of 1, 209 financial analysts, 41.7% use the price-to-earnings ratio as their primary metric, while 36.2% prefer EV/EBITDA. More importantly, the survey participants predict the latter metric will be the primary measuring tool for the future. All of this is going on in spite of the fact that of the 10 leading investment texts, only one has EV/EBITDA in the index or glossary. The survey also shows a resounding negative attitude toward new measures of income proposed by the International Accounting Standards Board (which would be used in valuation models in the future).


Private Equity Firms as Market Makers. ” The Journal of Private Equity (Winter 2010). Linus Siming.

In a study of 1,322 private-to-private transactions the author finds support for the hypothesis that private equity (PE) firms play an important role as market makers. A number of empirical results support this claim. First, part of what PE firms do is to keep an inventory of firms on which they do little operational improvements. In cases where PE firms exit their investments in less than 18 months of ownership, so-called quick flips, no statistically significant operating enhancing measures are observed. As time passes, the probability that an asset is sold to an industrial buyer in a trade sale is reduced. Overall, the results suggest that PE firms hold a menu of firms which they keep available, first, to industrial buyers and, second, for other PE firms.

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