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There is nothing wrong with a hedge fund buying these things speculatively and allowing for a more fluid transfer of risk. Hedge funds exist to make a market f
by Dilpil 17y ago
There is nothing wrong with a hedge fund buying these things speculatively and allowing for a more fluid transfer of risk. Hedge funds exist to make a market for these kind of exotic securities, greasing the wheels of the risk markets.
Buying a securitized version of these is very foolish for the pension funds. Securitization does not remove risks, it simply hides them in ways that pension fund managers are ill equipped to understand. Furthermore, these assets are potentially highly correlated- the article gives the invention of new AIDS treatments as one example.
An in depth lecture on the math behind securitization (of subprime loans, but it applies to this as well) can be found at http://www.hbs.edu/economic-crisis/research/financial-reporting-financial-markets-and-the-subprime-crisis.html http://www.hbs.edu/economic-crisis/research/financial-report....
- joe_the_user 17y agoI would suggest you take a second look at the fine video you link to. I watched it to the end. Notice that at the start of the video, it's mentioned how the entire CDO system exists to generate nominally AAA rated bonds which institutional investors like pension fund have an incentive to buy in order to "demonstrate" (well, actually fake) risk aversion. The video does a good, detailed dissection of the CDO generation process using math most people can understand but it's important to shorten it an executive summary: Wall Street sold a shell-game to institutional investors who were happy not to look closely at the supposed risk-free yields. The video gives an excellent demonstration also why there is no reason for a risk-taking Hedge fund to buy a synthetic bond. This is because synthetics only exist to give the illusion of magically lowered risk (equivalently "yield out of thin air"). A risk-taking investor should be financing start-ups or businesses in trouble and a risk-averse investor should be diversified between holding the bonds of large corporations and holding cash. No one should be buying the fiction that combining risky assets creates risk-less assets.
- sachinag 17y agoThis is the difference between skeptical adults and students who've read Ayn Rand and think they've figured it all out. Well done.
- joe_the_user 17y agoThe video really is good, one of the best elementary explanations I've seen of the problems of CDOs.
- Dilpil 17y agoYeah, like I said, terrible idea for the pension funds to buy these. I should have been more specific- hedge funds are better off buying the raw policies.