Mike’s note: Since I first found my way to the Bogleheads forum, one of the members I’ve most looked up to is an anonymous writer by the name of nisiprius. He’s always impressed me with his wit and insight, so when he offered a guest post in reply to last week’s “asset allocation comes first” article, I jumped at the chance to publish it. I hope you enjoy it.
Investors are taking a fresh look at roulette ETFs, which invest in bets on roulette wheels at casinos. Roulette gambling has long been used by hedge funds and university endowments, but was formerly out of reach of individual investors due to the time and cost of travel, and the difficulty of diversifying among casinos. But ETFs now provide low-cost access to this asset class.
Bram Stoker, senior analyst at Transylvania Capital Management, says “roulette spins have been shown to have low correlation with stocks, making them a powerful diversifier in a portfolio.”
It is important to understand the differences between roulette ETFs, because they don’t all work in the same way, so look under the hood before deciding which of them you need to add to your portfolio today.
Mike’s note: I’m 95% confident you’ve all figured this out by now, but just in case: This article is a satire, poking fun at (among other things) the product-focused nature of the mainstream financial media.
Index roulette ETFs, such as Roquefort’s ROQ, simply bet on red and black equally. Roquefort uses random numbers generated by a proprietary atomic decay device, and cites academic research that claims this reduces the standard deviation compared to traditional selection methods.
Roquefort also offers two chromic strategy ETFs: REDS, which always bets on red, and BLAK, which always bets on black. Stoker notes that these are riskier: “Be sure you know which color you like before investing.” Roquefort has just introduced OO, which bets on the double zero. The potential for 3500% returns is attractive, but Roquefort notes that due to volatility it may not be suitable for all investors, only for better-than-average investors like you.
Nisiprius Investments Ltd. says that its global roulette fund, WHEE, places bets in Monaco, Macau, Antigua, Baden-Baden, Moscow, and Sun City, South Africa. We talked to fund manager Blaise Pascal, who said “Why are you pestering me with all these silly questions? It’s global, what more do you need to know? Global! Global! Global! Do you hear me, global!”
Strategic Cluster Asset Modeling is a new entrant, providing two actively managed ETFs, CLUS and CLUD. CLUS follows a progressive cluster roulette gambling system, backtested with 40,000 spins. Spokesperson Mary Martingale says it could offer the possibility of a conceivable potential for steady winnings regardless of what the wheel does. CLUS is only for sophisticated investors. The minimum investment is $250,000, and you must include a photograph and three letters of recommendation with your application. CLUD, the 2X leveraged version of CLUS, has a minimum investment of $500,000 and you must send two photographs and six letters of recommendation, and the existing shareholders can blackball you. With $1.35 million assets under management, CLUD is off to a fast start, and both of its shareholders think the world of it.
What is an appropriate roulette allocation? “We are currently recommending allocations of 5-10% to all our clients,” says Stoker. “We think roulette will prove to be a valuable addition to their portfolios. We follow market trends closely, and if roulette doesn’t pan out we’ll have other hot asset classes to recommend, but what with the end of QE2, the sideways trend in the VIX, and uncertainty about the possible end of the world, our analysts think roulette is the place to be today.”
I asked Stoker whether the house percentage could cause the long-term return of roulette funds to show a long-term trend in any particular direction. He replied “Investors who limit their portfolio to assets with positive long-term returns are pathetic losers who are going to miss out. An asset may do nothing but lose money, yet improve the portfolio as a whole. Some guy once won a Nobel prize for showing how bonds help stocks. The correlations for roulette are even lower! You must not consider roulette in isolation, you must consider how it works in the portfolio as a whole.”
Which of these roulette ETFs will you add to your portfolio? Only you can answer that question. But you better add at least one of them. Today!