Hayne Leland

Last updated

Hayne Leland is an economist and professor emeritus at the University of California, Berkeley. Prior to becoming emeritus, he was the Arno Rayner Professor of Finance at the Haas School of Business. Before joining Berkeley, Leland was an assistant professor in economics at Stanford University, and he has held visiting professorships at the University of California, Los Angeles and the University of Cambridge. He received his A.B. from Harvard College, followed by an M.Sc.(Econ) at the London School of Economics and a Ph.D. in economics from Harvard. He received an honorary doctorate degree from the University of Paris (Dauphine) in 2007.

His research in capital markets and corporate finance has received several awards, including the inaugural $100,000 Stephen A. Ross Prize in Financial Economics in 2008. In 2016, he was named "Financial Engineer of the Year" by the International Association of Quantitative Finance. Leland served as President of the American Finance Association in 1997, and has served on numerous scientific advisory boards, including those of Goldman Sachs, Wells Capital Management, the Chicago Mercantile Exchange, and the Swiss National Science Foundation. He was an independent trustee of the mutual funds group of Barclays Global Investors (BGI), prior to BGI's acquisition by BlackRock.

Much of Leland's theoretical work has found direct applications in asset management and corporate financial structure. [1] [2] [3] This includes portfolio insurance, option pricing with transactions costs, and valuation of risky corporate debt. More recently, he has worked on introducing equity-sharing contracts in financing home purchase, and structuring retirement funds to provide assured income over retirement years.

Portfolio Insurance and the 1987 Crash. [4]

In 1979, Leland realized that then-recent work on option pricing could be applied to dynamically hedge a portfolio, resulting in a financial product termed "portfolio insurance". In conjunction with Mark Rubinstein, a Berkeley colleague and options expert, and John O'Brien, a financial industry professional, he co-founded Leland O'Brien Rubinstein Associates (LOR) in 1980 to provide portfolio protection strategies. [5] LOR's protected asset base grew rapidly, reaching $50b by mid-1987 (the equivalent of almost $500b when adjusted to the S&P 500 level in mid-2017). In 1987, Leland and his partners Rubinstein and O'Brien were co-named "Businessmen of the Year" by Fortune magazine.

The portfolio insurance strategy required that clients sell (to hedge) stocks or stock index futures as the market declined. During the crash of October 19, 1987, the drop in stock prices required LOR to sell large amounts of stock index futures, creating further downward pressure on stock prices. While portfolio insurance was not the initial cause of the crash, the Brady Commission Report examining trading that day concluded that insurance selling, roughly 15% of total stock and futures sold that day, was contributory to the magnitude of the crash. [6] Market mechanism failures, including the failure of the SuperDot system, were also held responsible in the Brady Report. [7]

The SuperTrust: The first U.S. ETF. [8]

Looking for a means to provide portfolio protection without dynamic trading, LOR then developed a fund structure to allow fully collateralized portfolio protection and basket trading. [9] LOR's SuperTrust consisted of two funds, known as SuperUnits, whose assets were S&P 500 stocks and short-term Treasury securities, respectively. To provide a basket product, shares of the SuperUnits required continuous trading when markets were open, similar to the trading of exchange-listed closed-end fund shares. But for the funds' market value to closely track the underlying portfolio value—a problem with closed-end funds whose shares often fell to discounts—fund shares also needed to be redeemable daily for cash or for underlying assets at net asset value (NAV). The SuperTrust's SuperUnits allowed smaller redemptions in cash, with larger redemptions in stock bundles. [10] The Investment Company Act of 1940 disallows such a fund structure, i.e., with simultaneous closed-end and open-end fund properties, but it does allow the SEC to provide exemptions to the regulations when they're deemed to be in the public interest. [11]

LOR applied for exemptive relief from the U.S. Securities and Exchange Commission (SEC) in April 1989. Arguments justifying LOR's request for exemption are available at http://www.40act.com/community/etf-supertrust-history-files/. While these arguments are now widely accepted and relief has been granted to hundreds of ETFs, the request was controversial at the time and required five amended applications and a hearing before the full Commission prior to final approval in October 1990. [12] [13] After some initial funding delays, LOR launched the SuperTrust with $1 billion in assets in November, 1992, with the SuperUnit shares trading on the American Stock Exchange (Amex). [14] The SuperTrust's SuperUnits were the first U.S. exchange-traded funds that allowed daily redemption of shares at NAV. The SuperTrust's Index SuperUnit was the first S&P 500 based ETF.

The Amex initially had cooperated with LOR to develop a basket product, but subsequently decided to follow their own path with the Standard and Poor's Depository Receipt (SPDR), also based on the S&P 500. Their request for exemptive relief from the SEC was filed over a year after LOR's, and approval was received two years after LOR's. [15] Their proposal was somewhat different in structure (e.g., redemption in large stock bundles only, and no sub-shares) but cited The SuperTrust exemptive order as precedent, using many of the same arguments made previously in application by LOR. [16]

The SPDR was launched in 1993, three months after SuperUnit shares began trading, with initial asset value just over $6 million. However, with the Amex's marketing blitz (e.g., "spiders" descending from the ceiling onto the trading floor) and campaign, the SPDR ultimately became the basket product that gained liquidity and for many years was the largest ETF. The SuperTrust, which had an initial term of 3 years, failed to gain competitive liquidity and was not rolled over after its initial term.

Related Research Articles

<span class="mw-page-title-main">NYSE American</span> Stock exchange located in New York City

NYSE American, formerly known as the American Stock Exchange (AMEX), and more recently as NYSE MKT, is an American stock exchange situated in New York City. AMEX was previously a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange.

Passive management is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

<span class="mw-page-title-main">Commodity market</span> Physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

A closed-end fund is an investment vehicle fund that raises capital by issuing a fixed number of shares at its inception, and then invests that capital in financial assets such as stocks and bonds. After inception it is closed to new capital, although fund managers sometimes employ leverage. Investors can buy and sell the existing shares in secondary markets.

A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe and open-ended investment company (OEIC) in the UK.

An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges.

<span class="mw-page-title-main">Invesco</span> Global investment management company

Invesco Ltd. is an American independent investment management company that is headquartered in Atlanta, Georgia, with additional branch offices in 20 countries. Its common stock is a constituent of the S&P 500 and trades on the New York stock exchange. Invesco operates under the Invesco, Trimark, Invesco Perpetual, WL Ross & Co and Powershares brand names.

A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds may be "fettered", meaning that it invests only in funds managed by the same investment company, or "unfettered", meaning that it can invest in external funds run by other managers.

In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company. UITs are assembled by a sponsor and sold through brokerage firms to investors.

iShares Family of exchange-traded funds (ETFs) managed by BlackRock

iShares is a collection of exchange-traded funds (ETFs) managed by BlackRock, which acquired the brand and business from Barclays in 2009. The first iShares ETFs were known as World Equity Benchmark Shares (WEBS) but have since been rebranded.

Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that are used to own gold as an investment. Gold exchange-traded products are traded on the major stock exchanges including the SIX Swiss Exchange, the Bombay Stock Exchange, the London Stock Exchange, the Paris Bourse, and the New York Stock Exchange. Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.

Mark Edward Rubinstein was a leading financial economist and financial engineer. He was Paul Stephens Professor of Applied Investment Analysis at the Haas School of Business of the University of California, Berkeley. He held various other professional offices, directing the American Finance Association, amongst others, and was editor of several first-tier academic journals including both the Journal of Financial Economics and the Journal of Finance. He was the author of numerous papers and four books.

SPDR funds are a family of exchange-traded funds (ETFs) traded in the United States, Europe, Mexico and Asia-Pacific and managed by State Street Global Advisors (SSGA). Informally, they are also known as Spyders or Spiders. SPDR is a trademark of Standard and Poor's Financial Services LLC, a subsidiary of S&P Global. The name is an acronym for the first member of the family, the Standard & Poor's Depositary Receipts, now the SPDR S&P 500 Trust ETF, which is designed to track the S&P 500 stock market index.

The United States Oil Fund is an exchange-traded fund (ETF) that attempts to track the price of West Texas Intermediate Light Sweet Crude Oil. It is distinguished from an exchange-traded note (ETN) since it represents an ownership claim on underlying securities that the fund has packaged. USO invests in oil future contracts that are traded on regulated futures exchanges.

AdvisorShares Investments is a US-based investment management firm based in Bethesda, Maryland which offers actively managed exchange-traded funds (ETFs) through the AdvisorShares Trust. AdvisorShares partners with third party financial advisers who already manage clients’ assets to package their investment strategy using exchange-traded funds. As part of promoting its funds it also provides educational support to help financial advisors and investors understand actively managed ETFs and their underlying investment strategies.

<span class="mw-page-title-main">SPDR Gold Shares</span>

SPDR Gold Shares is part of the SPDR family of exchange-traded funds (ETFs) managed and marketed by State Street Global Advisors. For a few years, the fund was the second-largest exchange-traded fund in the world, and it was briefly the largest. As of the close of 2014, it dropped out of the top ten.

<span class="mw-page-title-main">Investment fund</span> Way of investing money alongside other investors

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to:

The SPDR S&P 500 ETF trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest and oldest ETF in the world. SPDR is a trademark of Standard and Poor's Financial Services LLC, a subsidiary of S&P Global. The ETF's CUSIP is 78462F103 and its ISIN is US78462F1030. The trustee of the SPDR S&P 500 ETF Trust is State Street Bank and Trust Company. The fund has a net expense ratio of 0.0945%. The value of one share of the ETF is worth approximately 1/10 of the cash S&P 500's current level. On December 1, 2021, the 30-Day average daily volume range for the past 5 years was 82.45 million shares, making it the ETF with the largest trading volume. The sponsor is SPDR Services LLC, a wholly owned subsidiary of American Stock Exchange LLC. Dividends are distributed quarterly, and are based on the accumulated stock dividends held in trust, less any expenses of the trust. The trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 index.

Real Assets is an investment asset class that covers investments in physical assets such as real estate, energy, and infrastructure. Real assets have an inherent physical worth. Real assets differ from financial assets in that financial assets get their value from a contractual right and are typically intangible.

References

  1. ↑ "Replicating Options with Positions in Stock and Cash," (with Mark Rubinstein), Financial Analysts Journal, July–August 1981
  2. ↑ “Option Pricing and Replication with Transactions Costs,” Journal of Finance 40 (1985), 1283-1301
  3. ↑ "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance 49, (1994), 1213-1252.
  4. ↑ An extensive account is available in Diana Henriques, A First-Rate Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History. Henry Holt and Co., 2017. ISBN   9781627791649.
  5. ↑ Peter Bernstein, “The Ultimate Invention,” Capital Ideas: The Improbable Origins of Modern Wall Street. Free Press, 1992. Paperback edition, Wiley, 2005.
  6. ↑ "Brady Report": The Presidential Task Force on Market Mechanisms (1988): Report of the Presidential Task Force on Market Mechanisms. Nicholas F. Brady (Chairman), U.S. Government Printing Office.
  7. ↑ "Computer trading: leverage, forced asset sales, and market stability". GOV.UK. Retrieved 2023-08-24.
  8. ↑ A history of the SuperTrust and ETF history files is at http://www.40act.com/community/etf-supertrust-history-files/
  9. ↑ "Leland O'Brien Rubinstein Associates, Inc.: SuperTrust ^ 294050". HBR Store. Retrieved 2023-08-24.
  10. ↑ An additional feature of LOR’s fund shares was their optional divisibility into sub-shares termed SuperShares, one of which provided protection of the S&P 500 Index value over a three-year term that was fully collateralized by US Treasury securities. A more complete description is provided in P. Tufano and B. Kyrillos, op.cit., and the short video (1990) referenced at http://www.40act.com/community/etf-supertrust-history-files/
  11. ↑ In particular, exemption from Rule 22(d) was needed. Rule 22(d) required open-end fund shares to trade only at NAV, which was typically calculated only after the market close. See J.Heffernan and J. Jorden, “Section 22(d) of the Investment Company Act of 1940—its Original Purpose and Present Function,” Duke Law Journal Volume 1973: 975- 1008.
  12. ↑ In the Matter of the SuperTrust Trust for Capital Market Fund, Inc., (“SuperTrust”), Investment Company Rel. Nos. 17613 (Jul. 25, 1990) (notice) and 17809 (Oct. 19, 1990) (the “SuperTrust Order”), granting exemptions under Section 6(c) from Sections 4(2), 22(c) and Rule 22c-1 thereunder, and 22(d) of the Act and an order under Sections 11(a) and 11(c) of the Act. SEC News Digest, Issue 90-204, October 22, 1990, available at http://www.40act.com/community/etf-supertrust-history-files/.
  13. ↑ A fuller history of the difficulty in achieving the requested exemptions is provided in P. Tufano and B. Kyrillos, op.cit.
  14. ↑ Due to earlier licensing arrangements between Standard and Poor’s (S&P) and the Chicago Board Options Exchange (CBOE), S&P insisted that the sub-shares be traded on the CBOE rather than their more natural home on the Amex.
  15. ↑ The sequence of SuperTrust and SPDR filings is documented in https://www.sec.gov/comments/s7-11-15/s71115-12.pdf.
  16. ↑ SPDR Trust, Series I, et al., Notice of Application, File No. 812-7545, Investment Company Act of !940 Rel. No. 18959 (Sept. 17, 1992), See "Applicants' Legal Analysis," paragraph 4.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.