Such a long time without posting!
I've been organizing all the previous entries and seeing if I can craft a narrative from it all.
And I've been reading.
Here are some notes from a very engaging read: Ugly Americans: The True Story of the Ivy League Cowboys who Raided the Asian Markets for Millions (2004) Harper Perennial, by Ben Mezrich.
The book helps me understand the culture of high finance (especially in Asia); arbitrage; hedge funds; hedge fund practices; tracker funds; the relation between high finance and gangs/ mob.
Arbitrage is likened to buying a bunch of hamburgers cheap at one story and selling them at another store, where the price is higher, for more. But the trick is that others will do the same, and, assuming yuo want to make money, you dont want to saturate the market...Im not sure how one does this with stock market prices. From whom is one buying and to whom is one selling? Are you selling to different people than you are buying from? How much does the analogy hold?
"A hedge fund is a private investment vehicle...It's kind of like a mutual fund only it's pretty much unregulated and open only to private investors of the fund's choice....[the hedge fund] can do arbitrage...or [it] can buy and sell currencies, equities...a string of bagel shops..." The payment is 20% of the profits the fund earns plus 2% of the principle. (p. 82)"At the moment most hedge funds focus on arbitrage and shorting opportunties...pciking out losers, finding companies that are on their way down, betting against them, then helping them along. In short selling, "instead of betting that a company's stock would go up, you were betting it would go down..." somehow you actively expose the faults.
I dont precisely understand what Nick Leeson from Barings did. He was buying and selling futures in the Nikkei. And he was doing it in HUGE amounts, like 25% of the whole Nikkea market. I dont understand how one does this without having the money at hand, which he didnt. page 123: "Leeson's bet was simple...Futures pegged to the Nikkei 225 index. The Nikkei moves up, he wins. Down, he loses. Specifically, he had a ten billion dolar position in the NIkkei and if the market went below 19,000 points, Barings was toast." Jan 17, 1995 there was a Japanese earthquake and Leeson lost his bet. The Nikkei fell.
Ways the hedge fund described in the book made money: page 168: "An Arbitrage scheme involving Indonesian municipal bonds that had already earned 3 million dollars (for the hedge fund); a short selling position in yhr Singapore based textile firm that was hugely overvalues; and a quick 'in and out' trade deal involving a South Korean hardware chain, which was expanding its chain into Vietnam..." They were also "derivitive prop traders." What does this mean exactly?
p 185: "Privately run hedge funds...were rapidly outpacing mutual funds and the bankrolls of investment banks, and this made a lot of people extremely nervous because of the fund's secretive nature. ...On the norm, hedge funds charged an annual fee of between 1-1.5 percent of assets plus 20% profits...As rivate investment funds for the very rich, we're not legally allowed to advertise. We're not even allowed to put our company name on the building directory."
195: "We all know how tracker funds work...They're like a mutual fund but tied to an index, like the Dow Jones or the Nikkei. Usually a tracker fund contains a small number of shares from every stock in the index, so that it exactly mimics the index's progress. If the Dow Jones goes up ten percent, the Dow tracker goes up ten percent. It basically gives people a way of investing in an index without buying every stock on their own." ok
The Hang Seng is the Hong Kong stock index. The government created the H.S. tracker fund to help its economy. Its one of the biggest tracker funds in the world. The H.K. government runs the fund with the help of US investment advisors. They make sure it stays equal to the H.S. index.
There was a start up company, like a Yahoo search engine company, that was expected to enter to Hang Seng Index. It was merging with something in the tracker fund. So it was going to raise the value of the tracker fund. But they needed the Hang Seng to mirror the whole market. If the tracker fund was buying a bunch of the start up company's stock, the company stock would go up. (Why would this push the price up?) They learned that the co. founder was going to sell his stocks directly to the tracker fund. So this would make the price go down? Why? "M shorted one hundred million dollars of [the startup stock.] While everyone else...was buying up shares, M.had taken an enormous short position. The position had been easy to acquire, because of all the buynig from other banks and hedge funds..." Then the startup stock fell...
Then M "guessed that the Nikkei was going to change massively. He knew that at least a dozen huge tech companies were going to be added to the index, and fifteen dinosaur co.s were going to be removed. He knew that there would be a massive rush of buying on one side and selling on the other. He knew it was going to happen fast...and all at once...The announcement came Sunday afternoon. On Monday am, the Nikkei had dipped 7.5%. the companies being removed from the index were down 20%. The tech stocks being added to the index were also down, around 2%, because of the pressure from the Friday collapse of the US tech market and the uncertainty of what was going on with the Nikkei. M. began buying, eventually putting 400 million into tech stocks while shorting 400 million shares of Nikkei futures at the same time. On Tuesday he put another 200 million into the stocks, shorting the same in Nikkei futures. On Wed. another 200 million. On Friday he put a final 200 million making his total 1 billion in the tech stocks, with 1 billion Nikkei futures shorted. M. had leveraged the fund to the max...
Three minutes before closing...selling the tech stocks at their highs, buying the Nikkei futures back at the lows, unloading everything, every share, every bet...
That afternoon wall street had made 3 billion on the restructuring of the Nikkei, world markets as a whole had made over 4 billion. M had made 500 million."
Japanese gangs using Am. hedge funds because no regulations...to sell short other Japanese companies...
Questions I still have:
How have compueters affected this finance thing? Did it exist before?
What does it mean to take a short position?
Exactly how does that story of teh tech stocks and futures work --I dont understand how that made money.
What happens to stock money --when the government or a person buys a bunch of stock, where does that money go --to the company? I dont understand the logic.
What is a derivative prop trader? What are they trading?
When one deals in futures --what is the structure where one trades? Is there a separate institutional structure/place where futures are bet...
How are futures related to derivatives?
Does the futures/ derivatives/ arbitrage market have any regulations?
How exactly does one do arbitrage?
Is arbitrage related to currency trading?
How much of the world money supply is in hedge funds?
How important is it to understand all this stuff?
(How does that old Smithy statistic about 60 times more transactions happening in currency rather than in traded goods relate to all this?)
Are there really no hedge fund regulations?
What damage have hedge funds done, precisely?
What if any good have they done?
Can banks have hedge funds (I doubt it...is this why they passed Gramm Leach Bliley --to still compete?)
What exactly is a mutual fund and what regulations govern those?
I've been organizing all the previous entries and seeing if I can craft a narrative from it all.
And I've been reading.
Here are some notes from a very engaging read: Ugly Americans: The True Story of the Ivy League Cowboys who Raided the Asian Markets for Millions (2004) Harper Perennial, by Ben Mezrich.
The book helps me understand the culture of high finance (especially in Asia); arbitrage; hedge funds; hedge fund practices; tracker funds; the relation between high finance and gangs/ mob.
Arbitrage is likened to buying a bunch of hamburgers cheap at one story and selling them at another store, where the price is higher, for more. But the trick is that others will do the same, and, assuming yuo want to make money, you dont want to saturate the market...Im not sure how one does this with stock market prices. From whom is one buying and to whom is one selling? Are you selling to different people than you are buying from? How much does the analogy hold?
"A hedge fund is a private investment vehicle...It's kind of like a mutual fund only it's pretty much unregulated and open only to private investors of the fund's choice....[the hedge fund] can do arbitrage...or [it] can buy and sell currencies, equities...a string of bagel shops..." The payment is 20% of the profits the fund earns plus 2% of the principle. (p. 82)"At the moment most hedge funds focus on arbitrage and shorting opportunties...pciking out losers, finding companies that are on their way down, betting against them, then helping them along. In short selling, "instead of betting that a company's stock would go up, you were betting it would go down..." somehow you actively expose the faults.
I dont precisely understand what Nick Leeson from Barings did. He was buying and selling futures in the Nikkei. And he was doing it in HUGE amounts, like 25% of the whole Nikkea market. I dont understand how one does this without having the money at hand, which he didnt. page 123: "Leeson's bet was simple...Futures pegged to the Nikkei 225 index. The Nikkei moves up, he wins. Down, he loses. Specifically, he had a ten billion dolar position in the NIkkei and if the market went below 19,000 points, Barings was toast." Jan 17, 1995 there was a Japanese earthquake and Leeson lost his bet. The Nikkei fell.
Ways the hedge fund described in the book made money: page 168: "An Arbitrage scheme involving Indonesian municipal bonds that had already earned 3 million dollars (for the hedge fund); a short selling position in yhr Singapore based textile firm that was hugely overvalues; and a quick 'in and out' trade deal involving a South Korean hardware chain, which was expanding its chain into Vietnam..." They were also "derivitive prop traders." What does this mean exactly?
p 185: "Privately run hedge funds...were rapidly outpacing mutual funds and the bankrolls of investment banks, and this made a lot of people extremely nervous because of the fund's secretive nature. ...On the norm, hedge funds charged an annual fee of between 1-1.5 percent of assets plus 20% profits...As rivate investment funds for the very rich, we're not legally allowed to advertise. We're not even allowed to put our company name on the building directory."
195: "We all know how tracker funds work...They're like a mutual fund but tied to an index, like the Dow Jones or the Nikkei. Usually a tracker fund contains a small number of shares from every stock in the index, so that it exactly mimics the index's progress. If the Dow Jones goes up ten percent, the Dow tracker goes up ten percent. It basically gives people a way of investing in an index without buying every stock on their own." ok
The Hang Seng is the Hong Kong stock index. The government created the H.S. tracker fund to help its economy. Its one of the biggest tracker funds in the world. The H.K. government runs the fund with the help of US investment advisors. They make sure it stays equal to the H.S. index.
There was a start up company, like a Yahoo search engine company, that was expected to enter to Hang Seng Index. It was merging with something in the tracker fund. So it was going to raise the value of the tracker fund. But they needed the Hang Seng to mirror the whole market. If the tracker fund was buying a bunch of the start up company's stock, the company stock would go up. (Why would this push the price up?) They learned that the co. founder was going to sell his stocks directly to the tracker fund. So this would make the price go down? Why? "M shorted one hundred million dollars of [the startup stock.] While everyone else...was buying up shares, M.had taken an enormous short position. The position had been easy to acquire, because of all the buynig from other banks and hedge funds..." Then the startup stock fell...
Then M "guessed that the Nikkei was going to change massively. He knew that at least a dozen huge tech companies were going to be added to the index, and fifteen dinosaur co.s were going to be removed. He knew that there would be a massive rush of buying on one side and selling on the other. He knew it was going to happen fast...and all at once...The announcement came Sunday afternoon. On Monday am, the Nikkei had dipped 7.5%. the companies being removed from the index were down 20%. The tech stocks being added to the index were also down, around 2%, because of the pressure from the Friday collapse of the US tech market and the uncertainty of what was going on with the Nikkei. M. began buying, eventually putting 400 million into tech stocks while shorting 400 million shares of Nikkei futures at the same time. On Tuesday he put another 200 million into the stocks, shorting the same in Nikkei futures. On Wed. another 200 million. On Friday he put a final 200 million making his total 1 billion in the tech stocks, with 1 billion Nikkei futures shorted. M. had leveraged the fund to the max...
Three minutes before closing...selling the tech stocks at their highs, buying the Nikkei futures back at the lows, unloading everything, every share, every bet...
That afternoon wall street had made 3 billion on the restructuring of the Nikkei, world markets as a whole had made over 4 billion. M had made 500 million."
Japanese gangs using Am. hedge funds because no regulations...to sell short other Japanese companies...
Questions I still have:
How have compueters affected this finance thing? Did it exist before?
What does it mean to take a short position?
Exactly how does that story of teh tech stocks and futures work --I dont understand how that made money.
What happens to stock money --when the government or a person buys a bunch of stock, where does that money go --to the company? I dont understand the logic.
What is a derivative prop trader? What are they trading?
When one deals in futures --what is the structure where one trades? Is there a separate institutional structure/place where futures are bet...
How are futures related to derivatives?
Does the futures/ derivatives/ arbitrage market have any regulations?
How exactly does one do arbitrage?
Is arbitrage related to currency trading?
How much of the world money supply is in hedge funds?
How important is it to understand all this stuff?
(How does that old Smithy statistic about 60 times more transactions happening in currency rather than in traded goods relate to all this?)
Are there really no hedge fund regulations?
What damage have hedge funds done, precisely?
What if any good have they done?
Can banks have hedge funds (I doubt it...is this why they passed Gramm Leach Bliley --to still compete?)
What exactly is a mutual fund and what regulations govern those?
posted by oat collective at 12:32 PM
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