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
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: Suggested Citation