Leadership is a "Contact Sport"

Executive Coach, Mike Grant, explains why "Leadership is a Contact Sport". Drawing on his experience managing a sales team of over 600 people for the Lloyds Banking Group, Mike Grant explains why leaders need to get away from the desk and the laptop and engage with their people Read More

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Continuous Learning as Sustainable Competitive Advantage

Adrian Grant, Managing Director, BG Credit Limited discusses how to apply the 70:20:10 model to learning within the Credit environment. This article explores how best to configure learning in the world of credit in order to deliver the desired outcomes.

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BG Credit Public Courses

BG Credit, the specialised credit training division of the BG Consulting Group, announces its schedule of public training courses for spring 2014.

Want to find out more please contact us http://www.bgconsulting.com/

Hedge Funds

The term “hedge funds” is rather a misnomer, as it may give the impression that risks are hedged/offset. In reality, a hedge fund is an unconstrained, unregulated investment vehicle. However, as we shall see, the strategies employed by hedge funds do vary widely, so it is invidious to label them all as inherently very risky.

Key differences between mutual funds and hedge funds are:

• Hedge funds focus on absolute returns rather than returns relative to a benchmark
• Hedge funds use shorting (selling securities you do not own in the expectation of being able to purchase them later at a lower price). This is an advantage to investors in bear markets, as traditional fund managers are typically long of markets

• Hedge funds use leverage, i.e. borrowing money to take more substantial market risk
• Hedge funds use derivatives more frequently
• Hedge funds do have a higher asset turnover and trading activity
• Hedge fund managers often invest in the funds they are managing
• The fees paid by investors to hedge funds usually have an element that is related to the performance of the fund

• Hedge fund styles are many and various:
• Macro: following trends linked to economic/political developments
• Relative value: how assets perform relative to each other, often independent of the underlying market conditions. An example of this would be long Tesco shares and short Sainsbury shares
• Event-driven strategies. Examples include M&A risk arbitrage and trading distressed securities
• Opportunistic strategies. Traditional fund managers typically have relatively low asset turnover, operate a collegiate structure and are constrained by their benchmarks. The advantage of hedge funds is their ability to exploit pricing anomalies quickly and to take substantial risk

• As higher volume traders, the hedge funds can have an influence on asset prices out of proportion to the value of their holdings

Pension Funds

They collect and pool funds which they then invest in order to provide pension entitlements for beneficiaries in the future. The funds are supplied by either or both the individual employee and his/her employer. It is important to make the distinction between a Defined Benefit (DB) and Defined Contribution (DC) pension schemes.

A DB scheme (sometimes referred to as a final salary scheme) guarantees a pension to the employee usually based on the number of years of service at the company. In recent years, the cost of providing this benefit has risen significantly, as DB schemes have been hit by falling returns on investments, falling interest rates (which raise the present value of liabilities) and falling mortality rates (as people live longer, the liabilities will last for much longer). The combination of these factors has led to many established companies running large deficits on their pension schemes, with adverse effects on their financial strength. As a result, many companies have closed their DB schemes to new employees and may also have reduced their payouts. Today, most schemes are DC. Under a DC pension, the employee takes all the investment risk, as the ultimate size of pension he or she will receive will depend on the investment performance of the monies invested over time until retirement. 

The Priority of Payment

In the event of the insolvency of a company, there is a priority of claims on the assets of the company. The degree to which this actually happens depends on the legal environment of the country. A typical priority structure would be:

Institutional Investors

In today’s financial world, the role of the investors is a crucial one. Banks have moved away from taking the majority of risk on their balance sheet from clients who wish to raise capital. As a result, banks need to find providers of capital who wish to take risk and invest in those companies who are raising money.

There are a wide variety of investor types and we shall examine the principal ones. 

Trading Bonds

As we have said, there is a secondary market in bonds. However, the ease with which one can trade different types of bond varies widely. Bonds that are liquid are ones which are easy to trade. Such bonds would trade in large volumes with large individual ticket sizes, a narrow spread between the bid and offer price (i.e. the buy and the sell price), many market makers being willing to make a price, and the ability to trade in large size without moving the price significantly. Government bonds are usually the most liquid bonds. Most corporate bonds become fairly illiquid after issuance, particularly if they have been purchased by “buy and hold” investors who, by their nature, trade infrequently. Complex securities, such as structured credit instruments are not very liquid. The lack of liquidity in these bonds came into sharp focus as the fallout from the sub-prime crisis in the United States spread in the second half of 2007.