Dollars and Jens
Sunday, January 30, 2005
Principal-Protected Funds
Friday's issue of the Journal has an article ($$) on principal-protected funds. It seems the fund companies generally manage the funds and buy insurance on them from other companies; a lot of these insurance contracts agree that the fund will invest 75% or more in bonds, though Merrill Lynch seems to offer more equity-based funds than others.

I would think this would be a great use for index funds; the fund company, the customers, and the insurance company would all know exactly what's being offered. For an S&P index fund, the insurance company in this case would probably become the option markets, and I guess there's less room for a fund company to profit, since it's not hard for an investor to buy an index fund and some SPY puts on one's own. But fund companies could also put together their own index. As long as it's selected by an agreed-on algorithm rather than a fund manager, it should be insurable without agency costs.

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