Showing posts with label capital requirements. Show all posts
Showing posts with label capital requirements. Show all posts

Mar 14, 2010

Hedge Fun

Do you recognize the next situation?

You're at a birthday party or having a social evening. Everybody is having fun, talking to each other and - like usual - discussing the latest financial topics, scandals and solutions.

Suddenly someone turns to you and says: Heee.. you're an actuary, you can tell us what a a hedge fund is!

Of course as born or raised actuaries we all know what a hedge fund is. But when it comes down to explaining what a hedge fund is to clients, board members, friends or family, probably not one of us can explain it better than Paddy Hirsch, Senior Editor at Marketplace, can in the next Youtube video:

Now, when a Hedge Fund or a (Lehman)bank 'unexpectedly' gets into trouble, it simply uses the Repo 105 technique to to survive. Paddy Hirsch explains again.....

As professional risk managers we would expect these high risk Hedge Funds to operate under excessively severe capital requirements. Too bad...., this is not the case, as Mr. Timothy Geithner explains in the next video......

From Mr. Geithner's statements it's clear that Hedge Funds are de facto treated as 'Hedge Fun' until the systemic risk shows up.

However, when this risk becomes manifest, it will be to late to take appropriate measures.

Misunderstanding: Risk management
One of the great public misunderstandings of Risk Management is that most people - obviously including Government -think that Risk management is all about 'Managing Damage' after the corresponding loss has occurred.

As we know, Risk Management is about something else:

I. Identify, Analize & Prevent Risk
About 70% of Risk Management is about constantly identifying, analyzing and preventing risks from happening.

II. Emergency Response Plan
Another 20% is about proactively creating and updating Emergency Response Plans (ERP's) on how to deal with loss and how to limit and reduce that loss in case of the unfortunate event that a risk materializes in a loss.

III. Damage Reduction
Only the last 10% is about 'damage reduction' by executing the ERP's and tackling losses in case a risk - notwithstanding the measures taken - has resulted in a loss.

Perhaps we should offer (one volunteer is worth two pressed men) Mr. Geither a free Risk Management Course from the institute of actuaries.....

Read more about (the regulation of) Hegde Funds in an excellent (2006) paper by Dale A. Oesterle called Regulating Hedge Funds.

It's clear: there's nothing funny about fundy hedge funds....

Corresponding Links:
- Derivatives study center : Hedge Fund
- Regulating Hedge Funds (2006)
- Marketplace videos
- Will Lehman Brothers and Repo 105 allegations bring down Ernst & Young?
- Wikipedia: Repurchase agreement, Repo 105