Wednesday, February 07, 2007

Another Thought on Actively-Managed ETfs

A possible big downer. If the 'evil hedge funds', (sorry!) can 'crack' the rebalancing routines of an actively-managed ETF, and can front-run them, i.e., buy the things it will be buying first, then they will be lining up in droves to do so, to the detriment of the investors buying that fund. Tracking error could be an entirely inadequate phrase to describe the ugly result. Possible investors in any such fund should be given sufficient information to carefully evaluate the risk of the fund being exploited by front-runners.

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