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That seems accurate, but it doesn't seem to account for the risk of the hedge fund going bust. It's a high risk fund so they either have the cash buffer we talk
by vladimirralev 13y ago
That seems accurate, but it doesn't seem to account for the risk of the hedge fund going bust. It's a high risk fund so they either have the cash buffer we talked about or they transfer the risk to others. So the net effect is still null. The pension fund will be in much better position to take the 1% risk multiple times at sufficiently disconnected opportunities insuring each-other reducing the overall risk.
- mseebach 13y agoNo, the risk costs $500 and the hedge fund has that. They can't book the $500 before the loan has been repaid in full. The problem is what happens if the default risk (1%) turns out to be 2% instead. See: The subprime crisis.