Posts tagged: credit

Technical hedges of index fund liquidity risk

By Tai, April 17, 2010 7:29 pm

In markets where index funds are a feasible investment channel, investors can undertake strategies to hedge their position in such funds.

1. Investor, depending on their bargain power, may require installment of liquidity reserve. An increasingly popular calculation of a reserve is with Value at Risk (VaR). Reserve = VaR * multiplier

The more volatile the market is expected to be, the higher the multiplier is used.

Read more of VaR on JP Morgan and Benninga & Wiener 1998 1.

2. The position can be further hedged by entering a credit default swap.

Given these instruments, further concern of index fund service provider liquidity risk (default event on the commitment to investors when index rockets) might be attributed to other factors beyond the scope of this technical argument.

1 Benninga S. and Wiener Z., 1998, ‘Value-at-Risk (VaR)’, Mathematica in Education and Research, vol. 7 no. 4, 1998

A quick note on Dubai and emerging markets

By Tai, December 1, 2009 3:52 pm

1. Apart from leveraging to finance their growth, Dubai looked at other investment opportunities. i.e. investing in Vietnam.

I wonder if Dubai will require higher return on equity from their investments now?

2. Intuitively, it can be argued that after the event of the Dubai World standstill proposal, investors will be more cautious toward emerging markets.

However, no two countries are the same. Emerging markets like China, India and Vietnam have much larger populations (effectively markets for many industries) and are more diversified.

Dubai effect will ripple through, but not so devastating.

3. Nevertheless, a lesson can be drawn from excessively-leveraged development and the risk of change in credit ratings.

Social Media and Finance - part 2

By Tai, October 20, 2009 6:53 pm

Social Media and Alpha

From the perspective of a funds manager, social media create:

  1. Information inflow: for alpha capture
  2. Information outflow: to influence the market

Social Media and Corporate Governance

1. Individual investors have more tools for monitoring the companies they own.

2. Bargain:

Traditionally investors have certain tools in hand to influence the companies: board, proxy fight, external audit, internal audit, credit rating agencies

Social media supplements mass media in strategies in corporate decision, social attitude and regulation bargaining.

The power of Social Media should not be overlooked, as many will be tempted to use these low-cost tools.

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