5 ms·

This is the article I wanted informed comments on the most

metalliqaz 7y ago
I cannot provide a well informed comment, but I can offer this: I am not surprised at all that fund managers are slimy and dishonest.
- Maarten88 7y ago
  > slimy and dishonest Wouldn't this rise to the level of fraudulent and thus criminal?
  - corey_moncure 7y ago
    It's only illegal if you get caught, and then only if the fine is greater than the booty you got swindling honest people out of their money.
    - jacquesm 7y ago
      You really should add that /s.
      - jjoonathan 7y ago
        Why?
  - rjkennedy98 7y ago
    Tell me the difference between stupid and illegal and I'll have my wife's brother arrested. - Big Short
  - sailfast 7y ago
    If you have all of the "invest at your own risk" language in the fine print, you provide complete information about the investment, and then the user does not read the prospectus because it's too long / esoteric I'm not sure it gets to that level. The fact that these ratings have been assumed to be a reliable proxy for risk in the market (to the point that people automate based on it) is likely the bigger issue here and the larger cause of the systemic risk of incorrect ratings.
  - JackFr 7y ago
    Because to some extent the 'risk profile' is both aspirational and out of your hands. You can say 90% of your fund is investment grade, and S&P come in and downgrade a large holding of yours (or upgrade one).
    - MR4D 7y ago
      I work with fund managers on a frequent basis. They all have a requirement to sell when an investment crosses certain risk boundaries (such as ratings downgrades). Sure, some funds have a "go anywhere" IPS, but ratings downgrades often causes a flurry of asset sales. If you say your holdings are 90% IG, and then after a downgrade they are only 70% IG, then you have two options: #1 - sell the downgraded assets to bring it back into compliance, or; #2, if you are within your funds stated IPS, then you have to restate the number as 70%, and have to remove all literature that references the 90% number. IG = Investment Grade IPS = Investment Policy Statement
- mrfredward 7y ago
  >I cannot provide a well informed comment, but I can offer this: I am not surprised at all that fund managers are slimy and dishonest. And that explains why this article is on the front page of HN...not because the methods are accurate, but because the conclusion aligns with what people believe going in. Fund managers very likely are slimy, but this paper is too flawed to prove anything. Read the rebuttal from Morningstar. In the paper Morningstar's data is being assumed true while the bond funds are being criticized, so when Morningstar comes out and says that their data has a pessimistic bias, and the bonds funds ratings reflect more complete information, it seems pretty damning for the paper's assumptions.
  - metalliqaz 7y ago
    And you don't see any problem with the ratings agency having "incomplete" information when they try to evaluate risk?
    - MR4D 7y ago
      By definition, you cannot have complete information or you wouldn't have risk. Maybe you are trying to say something else?
      - metalliqaz 7y ago
        You can't know the future, but you can at least know exactly what is in the fund you are evaluating.
        MR4D 7y ago
        Not really. Reporting requirements don’t require daily reporting for mutual funds. So you only have quarterly resolution.
thedudeabides5 7y ago
Think of Morningstar like Uber, and the individual funds as individual drivers. Drivers have an incentive to lie about their hours or their insurance (to maximize profits) and Uber/Morningstar can try to force them to be honest, but in the end only so much. Individual funds are returns maximizing, and if they can convince Morningstar (or their ultimate investors) that they are making more return not for taking more risk, but through skill, they will attract assets and make more money. Thus it's explicitly in the fund managers interest to try to maximize return, while minimizing perceived risk. One way of doing that is through purchasing securities which are 'stamped' by a third party as less risky then they are (subprime being the classic example here). Morningstar can try to structure them into reporting their portfolio to avoid this, but that reporting system can always be gamed. Meaning, ultimately like with all investing, if you just trust the passive allocator/machine to make decisions for you based on overly simple or gamable rules...it will end in tears.

I cannot provide a well informed comment, but I can offer this: I am not surprised at all that fund managers are slimy and dishonest.

Maarten88 7y ago
> slimy and dishonest Wouldn't this rise to the level of fraudulent and thus criminal?
- corey_moncure 7y ago
  It's only illegal if you get caught, and then only if the fine is greater than the booty you got swindling honest people out of their money.
  - jacquesm 7y ago
    You really should add that /s.
    - jjoonathan 7y ago
      Why?
- rjkennedy98 7y ago
  Tell me the difference between stupid and illegal and I'll have my wife's brother arrested. - Big Short
- sailfast 7y ago
  If you have all of the "invest at your own risk" language in the fine print, you provide complete information about the investment, and then the user does not read the prospectus because it's too long / esoteric I'm not sure it gets to that level. The fact that these ratings have been assumed to be a reliable proxy for risk in the market (to the point that people automate based on it) is likely the bigger issue here and the larger cause of the systemic risk of incorrect ratings.
- JackFr 7y ago
  Because to some extent the 'risk profile' is both aspirational and out of your hands. You can say 90% of your fund is investment grade, and S&P come in and downgrade a large holding of yours (or upgrade one).
  - MR4D 7y ago
    I work with fund managers on a frequent basis. They all have a requirement to sell when an investment crosses certain risk boundaries (such as ratings downgrades). Sure, some funds have a "go anywhere" IPS, but ratings downgrades often causes a flurry of asset sales. If you say your holdings are 90% IG, and then after a downgrade they are only 70% IG, then you have two options: #1 - sell the downgraded assets to bring it back into compliance, or; #2, if you are within your funds stated IPS, then you have to restate the number as 70%, and have to remove all literature that references the 90% number. IG = Investment Grade IPS = Investment Policy Statement
mrfredward 7y ago
>I cannot provide a well informed comment, but I can offer this: I am not surprised at all that fund managers are slimy and dishonest. And that explains why this article is on the front page of HN...not because the methods are accurate, but because the conclusion aligns with what people believe going in. Fund managers very likely are slimy, but this paper is too flawed to prove anything. Read the rebuttal from Morningstar. In the paper Morningstar's data is being assumed true while the bond funds are being criticized, so when Morningstar comes out and says that their data has a pessimistic bias, and the bonds funds ratings reflect more complete information, it seems pretty damning for the paper's assumptions.
- metalliqaz 7y ago
  And you don't see any problem with the ratings agency having "incomplete" information when they try to evaluate risk?
  - MR4D 7y ago
    By definition, you cannot have complete information or you wouldn't have risk. Maybe you are trying to say something else?
    - metalliqaz 7y ago
      You can't know the future, but you can at least know exactly what is in the fund you are evaluating.
      - MR4D 7y ago
        Not really. Reporting requirements don’t require daily reporting for mutual funds. So you only have quarterly resolution.

thedudeabides5 7y ago

Think of Morningstar like Uber, and the individual funds as individual drivers. Drivers have an incentive to lie about their hours or their insurance (to maximize profits) and Uber/Morningstar can try to force them to be honest, but in the end only so much. Individual funds are returns maximizing, and if they can convince Morningstar (or their ultimate investors) that they are making more return not for taking more risk, but through skill, they will attract assets and make more money. Thus it's explicitly in the fund managers interest to try to maximize return, while minimizing perceived risk. One way of doing that is through purchasing securities which are 'stamped' by a third party as less risky then they are (subprime being the classic example here). Morningstar can try to structure them into reporting their portfolio to avoid this, but that reporting system can always be gamed. Meaning, ultimately like with all investing, if you just trust the passive allocator/machine to make decisions for you based on overly simple or gamable rules...it will end in tears.