Sunday, June 29, 2014

FRMO Corp 2014 Q3 Earnings Call

Highlights from the earnings call transcript [pdf].

Running an insurance company for "free float":

I would add to that, when we were seriously investigating, more than once, the possibility of establishing some kind of insurance subsidiary, I was given a long tutorial one afternoon by someone who had actually built one from the ground up for another investment firm that had done just what we were talking about. And, indeed, they had avoided—because they were also a conservatively-oriented firm, they wanted to avoid issues of undue periodic risk. And they went into a low-risk bread-and-butter type of insurance business, with short lives, just workaday niche type of insurance and so forth. And many purveyors will even send you a team that will do this for you.
And I think he did it successfully. But, as he explained it to me, what became apparent was there was so much effort involved not merely in setting it up and managing it, but you also have people involved, and you have your underwriters, and you have lawyers—the distraction clearly was great. And this fellow, who was very bright, who set it up for his boss, the head of this investment company, who was supposed to step into it once, set it up, and leave it—it is now his full-time job. So, he no longer is involved ininvestments; he is involved in insurance
That fund became the Kinetics Alternative Income Fund, which is designed to be the lower-risk version—also lower return—of the Kinetics Multi-Disciplinary Fund. The idea is, to the extent that it has a bond exposure, it is going to have a very short maturity, let’s say in the one-to two-year range, something like that. By way of contrast, the Kinetics Multi-Disciplinary Fund uses a longer maturity.
The ultra-ETF trade
"If you look at the denominator, which of course is the market value of the securities sold short, on February 2013, which is a little bit less than $2.3 million, that is actually a very big rate of return, which actually leads me into strategic items, which is why I bring it up. There is no magic there. All we’re doing is selling short various of the so-called path-dependent—or dysfunctional as I call them — indexes and exchange traded funds. The academic term is ‘path-dependent,’ which I’ll define momentarily, but the word I us is ‘dysfunctional.’ In the academic literature, path-dependent means that, sooner or later, no one can tell exactly when, those securities will gravitate towards a price of zero. It is much like Zeno’s Paradox: it never really gets to zero but is goes down 99.99999%, which is really very bizarre. The reason I bring it up is not to show we made any money, but for strategic reasons."

No comments: