A New Kind of Index Fund That Beats Its Index
Authors: Robert Ferguson and E. Robert Fernholz
Imagine, if you can, an index that requires the dynamic reweighting of the portfolio, based on the continuously changing capitalization weights of the index's securities. You would need a computer generated trading system, obviously, and a patent to protect it. The authors now have both, having had their patent granted in October 1998. And, while several papers have been written sicne the patent was applied for in 1995, the following is the first publication illustrating (in truly accessible language) the tie-in between the original theory of entropy-weighting, resulting in the Diversity-Weighted S&P 500 Index, a real index currently used by the authors to manage money. Readers will partake in a theoretical discussion of an entropy-weighted portfolio, with the benefit of this real world applicaton. A mathematical paper on Diversity Theory is scheduled to appear in a coming issue of The Journal of Mathematical Economics.