Using the Market to Beat the Market: A Look at 'Geared Beta' Strategies and Implications for Fiduciaries

Company and Securities Law Journal, Vol. 19, September 2001

Posted: 1 Nov 2001

See all articles by Paul Ali

Paul Ali

University of Melbourne - Law School

Martin Gold

Sydney Business School, University of Wollongong Australia

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Abstract

This article discusses new index-based investments known as "geared beta" strategies. These strategies employ derivative instruments to achieve dramatic outperformance of market returns.

Mutual funds which use enhanced indexing strategies can be classified as follows: those that employ securities-based enhancement and those that employ derivatives-based enhancement. Geared beta strategies fall within the second category. The article also briefly explains the other types of derivatives-based index enhancement, including derivatives arbitrage, option overwriting and portable alpha strategies. Geared beta strategies are distinguished from other index enhancement techniques as they have specific objectives that are generally quantified according to index sensitivity (beta).

In addition, the article examines geared beta strategies in the context of the over-arching duty of fiduciaries to act prudently when investing the assets entrusted to them. In particular, fiduciaries need to be aware of the compounding nature of the returns generated by geared beta strategies (which typically seek to exceed the daily performance or inverse daily performance of a benchmark index).

Keywords: Geared Beta Strategies, Indexing, Mutual Funds, Prudent Investor Rule

JEL Classification: G23, K22

Suggested Citation

Ali, Paul and Gold, Martin, Using the Market to Beat the Market: A Look at 'Geared Beta' Strategies and Implications for Fiduciaries. Company and Securities Law Journal, Vol. 19, September 2001. Available at SSRN: https://ssrn.com/abstract=286032

Paul Ali (Contact Author)

University of Melbourne - Law School ( email )

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Victoria, Victoria 3010
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HOME PAGE: http://www.law.unimelb.edu.au

Martin Gold

Sydney Business School, University of Wollongong Australia ( email )

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Sydney, New South Wales 2000
Australia
+61 2 9266 1300 (Phone)

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