Hedge Funds Strategies for Financial Situation- myassignmenthelp

Question: Discuss about theHedge Funds Strategies for Financial Situation Analysis. Answer: The table shows the basic differences between the bilateral repos and tri-party repos: Basis Bilateral Repos Tri Party Repos Manner of collateral selection Collateral assets and securities are selected either manually or on the automatic basis. For the settlement of tri party transactions only automated selection of collaterals is done. Settlement processes The transactions are only settled after obtaining the follow up from the parties. The settlement of processes is fully automated. Occurrence of Margin calls Margin calls occurs either once in a day or weekly or sometimes even monthly. Margin calls are fully automated. Eligibility criteria for collaterals The eligibility criteria used in bilateral agreement is quite simple to comply. The eligibility criteria in tri- party repos are highly sophisticated (Copeland, Duffie, Martin, McLaughlin, 2012). Administration The bilateral repos are administered manually (Gerardi, Goette, Meier, 2010). The administration process here is fully automated. Note: Diagrams are shown in the appendices section in the last. Haircut, in finance is defined as the difference between the assets market value as collateral security for loan and the loan amount. Loan value ratio is used by the lenders of loan to express the proportion of loan amount in the value for which the asset is purchased (Chapman, Chiu, Molico, 2011). It is expressed in percentage terms and indicates the percentage of loan amount in the total value of asset that is borrowed with the help of that particular loan funds. The percentage of haircut and LVR percentage in combination gives 100 of a percent (Wong, Fong, Li, Choi, 2011). In the present case the haircut percentage is given as 10% and it is equivalent 90% initial LVR on a margin loan. Leverage ratio depicts the debt to asset ratio in the present case as hedge funds are using various external sources of financing in order to apply the borrowed funds in investments and other assets generating higher returns. Moreover, the collaterals were sourced from the hedge funds which raised funds using various kinds of debt financing. From the graph it can be seen that in case of arbitrage strategy, highest leverage ratio has been determined for which funds were majorly arranged from repo financing using collateralized assets. Therefore the leverage ratio depicts the debt to assets ratio in the given graphical representation (COPELAND, MARTIN, WALKER, 2014) Leverage refers to the amount of debt funds used for asset financing and an arbitrage is the financial strategy in which there occurs a simultaneous purchase and sale of underlying financial assets in different markets so as to gain higher returns as a result of price differentiation (Martin, Skeie, Thadden, 2014). The hedge funds before making the advantages of arbitrage transactions requires to borrow funds so as to purchase the arbitrage assets and borrowing funds involves high leverage. As compared to other strategies of leveraging, arbitrage is involving lesser risks and even provides higher returns therefore hedge funds have used so much of leverage in arbitrage. Hedge funds raise funds from various sources of finance in order to deploy them in the higher income generating investments. One of those major sources is the external financing in the form of long credits (Sadka, 2010). In credit lines hedge funds uses the funds of external parties to leverage its investments assuming that this approach will amplify gains for it, in terms of higher returns than the borrowing costs. As external debt is involved in long credits there exists higher risk of insolvency. However, with the higher risks associated with long term credits, it enables the hedge funds to expand its profits largely by leveraging investments with greater returns (Stefanini, 2010). Bibliography Chapman, J. T., Chiu, J., Molico, M., 2011. Central bank haircut policy. Annals of Finance , 7 (3), pp. 319-348. Copeland, A., Duffie, D., Martin, A., McLaughlin, S., 2012. Key Mechanics of the U.S. Tri-Party Repo Market. Federeal Reserve of New York Bank Economic Policy Review , 18 (3), 17-28. COPELAND, A., MARTIN, A., WALKER, M., 2014. The Journal of Finance. Repo Runs: Evidence from the Tri-Party Repo Market , 2343-2380. Gerardi, K., Goette, L., Meier, S., 2010. Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data. Federal Reserve Bank of Atlanta Working Paper Series No. 2010-10 , 54. Martin, A., Skeie, D., Thadden, E. L., 2014. Repo Runs. The Review of Financial Studies , 27 (4), 957-989. Sadka, R., 2010. Liquidity risk and the cross-section of hedge-fund returns. (Elsevier, Ed.) Journal of Financial Economics , 98 (1), 54-71. Stefanini, F., 2010. Investment Strategies of Hedge Funds (Vol. 577). John Wiley Sons. Wong, T., Fong, T., Li, K.-F., Choi, H., 2011. Loan-to-value ratio as a macroprudential tool-Hong Kong's experience and cross-country evidence. Retrieved October 6, 2017, from hkma.gov.hk: https://papers.ssrn.com/sol3/papers.cfm?Abstract_id=1768546