Mutual Funds: What is Superposition?
The experiment goes something like this: Schrödinger arranged for his imaginary cat to be kept prisoner in an imaginary box, where the radioactive decay of an atom decided whether or not the cat lived or died.
Schrödinger said that until you open the box, the cat is both alive and dead, in a superposition of states.
He said this was a nonsense. But now we realize it does actually work. The observer problem can be solved like this: If you put an observer in the box too, what happens is that observer + cat are in the state “observer sees cat dead and cat is dead” AND “observer sees cat alive and cat is alive” but until we open the box, we still don’t know which.
The universe behaves as if it wants to leave it until the last possible minute to tell us what happens.
In our discussion in the book “Mutual Funds for the Utterly Confused (McGraw-Hill, 2008)”, we look at the possibilities of superposition and money market funds. If you have been paying attention - close attention because there is some many newsworthy financial events taking place as I write this, it is hard to keep track of which ones apply to you.
Money market funds received some bad news on September 17th, 2008 when the Primary Fund, managed by money market shop The Reserve announced that because of their holdings in Lehman Brothers mortgage backed securities (MBS), they would be forced to do what had only been done once before - “break the buck”.
These safest of safe havens offer investors the opportunity of keeping their dollar at a dollar while receiving some yield for their “Investment”. That dollar net asset value is supposed to remain constant. Not since 1994 when Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents, has a money market fallen below the dollar level. The Primary Fund fell to 97 cents and told those trying to redeem that withdrawals would have a seven day cooling off period before the money would be returned.
Big fund companies such as Fidelity and Vanguard Group were able to shore up their funds allowing them to remain at zero. This will come with a cost as well that has yet to be passed down to investors. Anne Crowley of Fidelity Investments was quoted as saying “We can state unequivocally that Fidelity’s money market funds and accounts continue to provide security and safety for our customers’ cash investments.”
This turned the superposition, the physics theorem that suggested that you could be safe and gain/lose yield at the same time, in other words, be two places at the same time on its collective head. We now knew the fate of the cat in the box.
