ETF hedge funds: The Infinite Monkey Theorem
| Nov 23rd, 2009 | Filed under: Alternative Beta & Hedge Fund Replication, Today's Post | By: Alpha Male |
The infinite monkey theorem states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will eventually bang out some sort of recognizable text, such as the complete works of William Shakespeare.
Along the same lines, one might argue that Exchange-Traded Funds, or ETFs, are in alternatives’ form at least a version of the monkey-at-typewriter theorem, by virtue that a synthetic composition of securities combined into something that is purportedly a hedge fund can mimic, if not the best, but the same strategy and returns as a hedge fund manager — eventually.
All this monkey business theory stems from Rye Brook, New York-based IndexIQ’s release of the IQ ARB Merger Arbitrage ETF (ticker: MNA), which began trading this past Tuesday.
How it works: the ETF relies on a fixed rule book – the main requirement being that an acquirer must have offered a premium to a target company’s market price: More…
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It would be interesting to compare the following:
(1) results of a long/short arb strategy, over the last 10 years, on the 20 biggest annual acquisitions
(2) same, but using the index futures or ETF as the short component (as the MNA fund does)
(3) the actual results of actual merger arb hedge funds (is there an index for this?) over the same time frame Shocked
Could be enlightening.