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Risk-averse clients in the omnibus fund can take short legs, and risk-tolerant ones long legs. Management of the omnibus fund can handle the mechanics of the swaps or futures. The effect would be not less leverage per se, since leverage at the individual account level is substituted for leverage at the corporate level. The difference is duration. Swaps and futures are short-term commitments. Three months is typical. Futures trade in active markets, for good measure, and can usually be liquidated in seconds at current market during trading hours. So can ETFs themselves. What do these derivatives cost? Essentially nothing. Those who prefer safety and the short leg are matched with those who prefer return and the long leg, while the manager charges only for its time in working the mechanics. What About Asset Allocation? Where the omnibus fund seems to violate common sense is in merging out what had seemed to be valuable distinctions. So it would seem with the blending of equity and debt claims, but for an optional overlay of derivatives such as futures to restore whatever risk and expected return we want. Many distinctions blended out, including that one, have been important to principles of asset allocation and modern portfolio theory. They are important because some investment sectors are less correlated than others, meaning less likely to risk and fall in lockstep. Low- correlation portfolios are better because less volatile as a whole without sacrifice of return. That’s why hedge funds typically assemble portfolios judged low or negative in correlation, and then try to reduce correlation still further with an overlay of derivatives. The omnibus fund seems to throw away all these options. Not really. One of the lessons of the 2008 crash is that everything but Treasuries tends to go down in high winds. Anti-correlation strategies failed when we most needed them. The omnibus fund isn’t really giving up so much. Its exceptional diversity makes it begin with less correlation than specializing portfolios. And Chapter 8 Banks, Money and Macroeconomics 2/8/16 5 HOUSE_OVERSIGHT_011094