Hedge Funds

Difference between a hedge fund and a mutual fund
To start with let us see why the name hedge fund? Why not some other fund, well i would say that hedge funds are a misnomer, hedge funds are actually investment vehicles generating absolute returns. Mutual funds have a lot of constraints but a hedge fund has no constraints, that is because they can take money from only accredited investors, they are people who have $5million. Provide steady returns or the illusion of low risk returns. Ideally do not rock the boat. Ensure low volatility by investing in a lot of different markets so that you are not over exposed to any one particular market. Long term capital management called their strategy as "Sucking nickels that others could not. One single observation can destroy thousand of years of confirmation. All you need is one single bet to destroy the years of returns. "Sometimes even the improbable happens". Rare events happen more often, and when they happen they are far more devasting when they happen.

• A mutual fund will not go short, while a hedge fund will be short on quite a many occasions. The simple reason being that when you are short and your bet goes wrong you might loose quite a major chunk of your investment. The reason why it is so is simple let us say you buy a stock with the current market price at 100 and u expect the stock to go up but it does not go up and say it reaches a value of 0. So the maximum you loose is 100 rupees. But let us say you are short on a security because you expect the price to go down. Now instead the price goes up, the problem here is the price can go up-to any range. If it goes upto 250 then you will make a loss of 150 rupees. Therefore mutual funds prefer not to short. So mutual funds generally tend to make losses when share price goes down



• Hedge funds normally do not have any benchmark index to beat, they run on absolute returns.Now to illustrate that let us say that the market is down 20% so the mutual fund might say that we are down only 18% thus we are better off by 2% but that is not what hedge funds do, they belive in a absoulte return, irrespective of how the market moves, they must give their investors a 20% return



• Hedge funds believe in a lot of leverage, so the return are quite big in case you have a correct position. Let us say that you have 2000 rupees as your personal wealth. Now you can leverage up to 4 times. So you have now 25000 in all. You buy let us say 500 shares @50. Now the price goes up to 60 rupees. So the net profit that you make is 10*500=5000. Let us say the margin money that you had was at a interest of 15% per annum and you had the position till one month. So the interest payable becomes 20000*1*15/(12*100)=250. So net profit =5000-250. The return is 5250/5000 which is more than 100% return.



• Hedge funds are not regulated, then generally do not have to disclose how they operate what strategies they adopt but a typical mutual fund will have to calculate the NAV (Net asset value every day and report it to the investors). Moreover due to their unregulated nature the decisions to market events can be made quickly as compared to mutual funds which take a long time in decision making.

The hedge fund collapse Reason

Earlier people believed that there were only white swams and everywhere they went they could only see white swams. So it was like no other color swam could be exist but one fine day explorers discovered a black swam in Australia and hence the age hold finding were destroyed. you just require one major event to prove everything wrong even the mathematical models.All you need is one single behemoth to destroy your years of track record. Sometimes even the highly improbable happens.People underestimate the likely hood of rare events. Rare events happen far more frequently and they are far more devastating than can be thought by mathematical models.a crisis of confidence because of the event that seemed improbable until it happened.

Strategies adopted by a hedge fund?

There are different methods adopted by hedge funds to make money
they short and long both. The hedge fund where i worked believed in a view of fundamental Mispricing and made money on the basis of that. If they had a variant perception about a particular thing then they would hold on that view till the market also included that view in their calculations.

Understanding the Google Buisness

Google has been a technology giant for a long period of time since its inception. It has been able to deliver the users results most relevant to them and has drawn huge number of people towards it. In india People are generally heard saying "Google humari mata hain humme kuch nahi aata hain" (Google is our mother, we donot know anything"). Ask an engineering or an MBA graduate and he would tell you the importance of Google in his degree. In fact it would be appropriate to say that all Engineerign and MBA colleges should on their degrees write in association with Google. Google is like an index to a book. You need to go to this page if you need to go anywhere otherwise you will be lost in the billion page book.

Google has managed itself well over the years and the culture prevalent is one that many would want to work in. But everyone is not so lucky. Well I can go on telling how Google has helped me and people around me. But the point of writing this blog is not to praise Google or anything, but understanding how Google earns its revenues and an understanding of the various terms on its annual reports which is pretty interesting to read btw.

Let us start with the most important thing, everything that Google offers to people like you and me is free of cost so where does it run, how do they generate revenues.
Well it was a question that pestered me quite a lot when i had the sense to understand that companies have to generate revenues themselves to survive, government does not help them. Finally i came to know that Google earns revenues through its adWords Program. Now next question would be do they earn enough through this to sustain themselves. The answer is yes they earn an amazing amount by this method.
To tell you in brief adWords is a program under which advertisers bid for placing their ads on the top, based on the key words entered by the users. These ads are displayed on the Google website when you search for a keyword as sponsored links on the right side. Every time you click on the ad Google gets revenue. Its like you are leasing a part of the Google web page and pay them only when the user clicks on the ads. Now a problem is the user might click accidentally on the ad. Earlier this used to be the case, so the simple solution was make click able only the link and not the whole ad thus preventing the accidental clicks.

The second program is the adSense, this program is used by people like us to earn revenues through our blogs. As an individual you need to get yourself registered on the adSense program and then you can paste the ads on your website. These ads are of two types adSense for Search and adSense for Content. adSense for search is when the website owner uses the Google search on his website customized to his tastes and the website. adSense for content becomes effective on html pages like blogs or articles. Google tries to draw an inference about the type of page and then on the basis of this displays the relevant ads. Now all these websites on which Google places its ads are referred to as Google Network Websites. Now the next logical question is what is the incentive for us to allow Google to place their ads on our websites. Well the logical answer to this logical question is MONEY. Google shares with us the revenues that the advertiser pay Google. The model works like this, if a reader on your website clicks the ads, then a part of the revenue comes to you and a part goes to Google. The portion of the fee that gets payed to the network members is referred to as the traffic acquisition cost or TAC.

99% of the revenues for Google since the past 4 years have been coming through the two programs alone. The remaining 1%comes from its licensing of its search application for enterprise clients.

Cost of revenues comprises of the following costs, money shared with the network members, cost in maintaining the data centers, to partners who put Google toolbars etc for distribution (referred to as Access points), money to those who direct search queries on Google website. It also includes depreciation, labor and bandwidth costs along with credit card and transaction fees.

The Indian Financial Structure

"Banking industry is consolidating and diversifying". The mergers in banks are not like the mergers that take place in companies. In case of companies the two parties decide among themselves whether to go for the merger or not. But in case of Banks it is the RBI that governs which banks should go ahead with the merger. In case of US the government initially there were 1600 banks at the start of the 19th century but now there are more than 13 banks. In India the situations is not like that and there are a large number of banks, the sole reason has been that in India sentiments of hte locals play a huge in rule in decision making on the choice of the bank. People of mysore would prefer to put there money in Bank of Mysore and not Bank of Travancore. Though both belong to State bank but if they are merged then the money might move out to a third bank.

Diversification is in terms of services offered by the bank. Earlier banks used to be places simply for parking your money and borrowing money but over time this outlook is changing and banks are getting into different business lines like underwriting, M&A advisory and trading scrips.

Difference between banks and Non Banking Financial Institutions ?
Both are same apart from the fact that NBFC's are not allowed to issue negotiable instruments like bill of exchange (Cheque's) and promisory notes (notes, cash that we normally have with us)

What are scheduled banks and Non-scheduled banks?
Scheduled banks are those which are mentioned in the schedule II of the Reserve Bank of India(RBI) Act, 1934 [http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/54435.pdf] (Page 54 first two bullets). Scheduled banks must meet two requirements

• Paid up capial must be greater than 5 lakh


• RBI should feel that the banks should not run away with the capital

For a list of the scheduled banks in India refer to the link below
http://finance.indiamart.com/investment_in_india/scheduled_commercial_banks.html

Non-scheduled banks are only 4 in India namely




How are banks in India incorporated ?
Banks in india can be incorporated by three laws
SBI act
Banking regulation act
COmpanies act 1934

SOme of the banks like Kotak Mahindra are incorporated as companies the reason being that getting a license to operate as a bank under the banking regulation act is quite difficult.

TRENDS
During the 19th century there was a credit repression which was being faced by the industry. You could not give the credit freely based on the credentials of the person. The person to whom you would lend was being regulated by the RBI. RBI would make statements like "you would this year lend only to equipment manufacturers". But this has changed now and the banks are free to lend to anyone they deem credit worthy.

Eg.2 Till the 1990's the education loan interest rate was being guided by the RBI. so there was parity in the interest rates given by banks. But as the market got re-regulated RBI now only specifies the upper cap and banks are free to charge what they wish to.

To put in short till the 1990's we were in a regulated financial service market but now it has been re-regulated(do what-ever you feel but up-to a limit not beyond) and deregulated (do whatever you feel like).

The banking sturucture
1st tier
2nd tier
3rd tier

Infrastructure sector

Rising cost put pressures on margins. The construction business is very sensitive to input costs as they comprise around 80% of the total costs. The prices of bitumen, steel, oil and cement have blown through the roofs and have almost doubled in the last couple of years. Due to this the margins will be impacted to a large extent.

One more thing most of the stocks of the construction companies are owned by FII so now they are trying to exit the position thus creating a selling pressure on the stocks.

The raw materials cement and steel make upto 35% of the input cost in case of railways.
The government is planning to modify the way in price escalation clauses are built. Now instead of linking the price rise to WPI indices they have linked the price rise to prices published by the steel authority of India for the steel prices. In the future the same may be expected in order to prevent the contractors from bearing all the price increase pressure.