Understand economics from scratch

Chapter 30 Why You Don’t Manage Your Money—Practical Finance You Must Know (2)
Seeing this, you must be wondering, how can hedge funds make so much money in the context of a comprehensive economic depression?What exactly is a hedge fund?
Hedge funds (also known as hedge funds or arbitrage funds) refer to funds that have hedged their risks and originated in the United States in the early 20s.Early hedging was a true store of value and was used in agricultural markets and foreign exchange markets.The purpose of the operation at that time was to use futures, options and other financial derivative products, as well as the operating skills of short-selling and risk hedging of different related stocks, to avoid and resolve investment risks to a certain extent.Hedgers are generally actual producers and consumers, those who own goods to sell in the future, those who need to buy goods in the future, those who have creditor's rights to collect money in the future, and those who owe debts to repay in the future, etc.These people are all faced with the risk of suffering losses due to changes in commodity prices and currency prices. Hedging is a financial operation done to avoid risks. The purpose is to avoid (pass on) the exposed risks in the form of futures or options. So that there is no exposure risk in your own asset portfolio.For example, a French exporter knows that he will export a batch of cars to the United States in 50 months and will receive 3 million US dollars, but he does not know what the exchange rate of the US dollar to the franc will be in 100 months. will suffer losses.In order to avoid risks, you can short sell the same amount of U.S. dollars in the futures market (payment after 3 months), that is, lock the exchange rate, so as to avoid the risk caused by the uncertainty of the exchange rate.Hedging can be both short selling and short buying.If you already own an asset and plan to sell it in the future, you can lock in the price by selling the asset short.

After decades of evolution, hedge funds have lost their original connotation of risk hedging, and have evolved into a synonym for a new investment model, that is, based on the latest investment theories and extremely complex financial market operating skills, making full use of various financial assets The leverage effect of derivative products is an investment model that takes on high risks and pursues high returns.

The advantage of this kind of financial game is that it can give fund investors very high returns.The reason is that a hedge fund can manipulate deals that are much larger than its own capital because it can "buy short" with the cash it gets from the "short sale" process.Sometimes a hedge fund can control deals that are 100 times larger than its own capital, meaning that if the capital it controls goes up 1% or its liabilities go down 1%, its capital doubles.

The downside of this financial game is that hedge funds lose money very quickly.If the market moved against the hedge fund's estimates, it could easily deplete the hedge fund's capital or at least render it incapable of selling short, that is, creditors who lent the hedge fund stock or other assets would demand pay off debts.

The organizational structure of hedge funds is generally a partnership system.Fund investors enter the group with funds and provide most of the funds but do not participate in investment activities; fund managers enter the group with funds and skills and are responsible for the investment decisions of the fund.Because hedge funds require a high degree of concealment and flexibility in their operations, the number of partners in hedge funds in the United States is generally controlled below 100, and each partner's investment amount is more than 100 million US dollars (different countries, for hedge funds) Fund regulations are also different, for example, Japanese hedge fund partners are required to be controlled under 50 people).Since most hedge funds are privately funded, they avoid the strict requirements of US law on the disclosure of public fund information.

The most famous hedge funds are George Soros' Quantum Fund and Julian Robertson's Tiger Fund, both of which have created a compound annual rate of return as high as 40% to 50%.George Soros is an American entrepreneur who was born as a Hungarian refugee. In 1969 he founded the Quantum Fund.Soros has always been good at making money against the economic crisis. His representative work is that in the "Black Wednesday" in 1992, he frantically shorted the pound, defeated the Bank of England, and made a profit of as much as 15 billion U.S. dollars in this campaign.

This matter stems from the fact that the United Kingdom joined the European Monetary System's Exchange Rate Mechanism (ERM) in 1990, a fixed exchange rate mechanism for the transition to a unified European monetary system. However, the United Kingdom did not like this system that was forced to join.Although legally all countries are equal, in practice, each country is aligned with the currency system of the German central bank.At the same time, the United Kingdom, which entered the European Exchange Rate Mechanism on a relatively high exchange rate basis, is in a relatively serious economic recession, and its government's support rate is getting lower and lower.While officials vehemently deny that Britain will leave the ERM, there is always nagging question whether they really think so. In September 1992, the head of the German Central Bank published an article in the "Wall Street Journal", in which he mentioned that the instability of the European monetary system can only be resolved through currency devaluation.Soros was astutely aware that the rising bubble economy in the UK would inevitably cause the authorities to devalue the pound, and the Deutsche Mark would no longer support the pound, so his Quantum Fund borrowed a large amount of pounds with a 9% margin to buy the mark.His strategy is: before the exchange rate of the pound falls, buy the mark with the pound, and sell a part of the mark after the exchange rate of the pound plummets to repay the pound borrowed at the beginning, and the rest is a net profit.In this operation, Soros' Quantum Fund short-sold the pound equivalent to 5 billion U.S. dollars and bought the equivalent of 70 billion U.S. dollars in marks, making a net profit of 60 billion U.S. dollars in more than a month. The central bank lost a total of 1 billion US dollars, and the incident ended with the exchange rate of the pound falling by 15 in a month.

There is no question that hedge funds have ravaged world markets.Considering the great harm of hedge funds, a financial giant, at the London Financial Summit, countries reached a consensus to jointly crack down on speculative forces such as hedge funds and tax havens in the international financial market, which will bring hedge funds into the scope of supervision.It seems that the prospects for this financial predator are not so optimistic.

Virtual economy: intangible but visible
Assuming a market, there are two people selling biscuits, and there are only two people, we call them biscuits A and biscuits B.They sell each sesame seed cake for 1 yuan to protect their capital.

A game has started: Biscuit A spends l yuan to buy a biscuit from biscuit B, and biscuit B also spends 2 yuan to buy a biscuit from biscuit A.Shaobing A spends another 2 yuan to buy a sesame seed, and Shaobing B also spends 3 yuan to buy a sesame seed, and the cash is delivered.Shaobing A spends another 3 yuan to buy a sesame seed, and Shaobing B also spends [-] yuan to buy a sesame seed, and the cash is delivered.

So in the eyes of people in the whole market, the price of sesame seed cakes soared, and it rose to 60 yuan per sesame cake in a short while.But as long as the number of sesame cakes in the hands of Shaobing A and Shaobing B is the same, no one makes money, and no one loses money, but their assets "appreciate" after revaluation.Both Shaobing A and Shaobing B have "wealth" that is many times higher than in the past, their worth has increased a lot, and their "market value" has increased a lot.

At this time, there was a passer-by who knew that the biscuits cost 1 yuan when he passed by an hour ago, but now he was surprised to find that the price was 60 yuan.He bought one without hesitation. He was sure that the price of biscuits would rise and there was still room for improvement, and someone gave a "target price" of more than 200 yuan.

Under the demonstrative effect of sesame seed A and sesame seed B making money, and even passerby C making money, more and more passers-by will buy sesame seed cakes, and more and more people will participate in the transaction, and the price of sesame seed cakes will rise steadily.All were very happy, but strangely: none of them lost money.

Someone asked: Will buying biscuits never lose money?Apparently yes.But suddenly one day a person came to the market and said: "The cost price of a biscuit is l yuan".One word awakened the dreamer, and people suddenly discovered that the biscuits are indeed not that high in value.As a result, people rushed to sell, and the price of biscuits dropped sharply.

At this time, who made money?It is the person who owns the fewest biscuits!
Compared with the real economy, the virtual economy is the inevitable product of economic virtualization.It is a new term that has appeared in recent years. The most common explanation refers to economic activities related to the circulation of virtual capital mainly based on the financial system. Simply put, it is the activity of directly generating money from money.

A few people who dreamed of getting rich day and night used many methods, such as setting up factories, raising cattle and sheep, mining mines, etc., but the final results of these actions ended in failure.With nowhere to make a fortune, they came up with a coup:
They took some pieces of paper with a face value of 1 yuan and said to a group of fools who were also eager to get rich, look, we have some magical pieces of paper here, they are not currency but they are worth more than currency.They represent a growing mountain of gold, and you can get a lot of money through its magical appreciation.You see, these pieces of paper have appreciated in value now, and we can sell them for 5 yuan a piece.So the idiots swarmed up, buying first, and they bought a piece of paper for 5 yuan.

The fools who didn't buy them later bought those pieces of paper from the fools in front at a price of 10 yuan, 20 yuan, or even more than 100 yuan, and paid the handling fees to those scammers.Because each fool knows from the experience of the previous fool that the pieces of paper will go up in value, and there are bigger fools who buy them at a higher price so they can make more money.However, until one day, the fools discovered that those pieces of paper were not even worth 1 yuan, so the fool who finally bought those pieces of paper at the highest price became the biggest fool.

The fool who has made money is happy to buy another piece of paper, hoping to make a bigger fortune.And those who have become the biggest fools, who lost their wives and soldiers, and cried to their parents and mothers with those once glorious pieces of paper to no avail, then inexplicably doubted this and doubted that.

The earliest origin of the virtual economy can be traced back to the commercial lending behavior between private individuals.For example, person A needs to buy some kind of goods urgently, but he himself does not have enough funds, and person B happens to have a sum of money idle on hand, so person A borrows a certain amount of money from person B and promises to repay the principal within a certain period of time pay interest.The IOU in the hands of B is a prototype of fictitious capital, which gains value through the cycle of borrowing and repayment.At this time, Person B did not engage in actual economic activities, but only made money through a virtual economic activity.

Virtual economy has the following four basic characteristics.

1. High mobility

Real economic activities take a certain amount of time from production to realization of demand, but the virtual economy is the holding and trading activities of virtual capital, which is only the transfer of value symbols. Compared with the real economy, its liquidity is very large.With the rapid development of information technology, virtual capital such as stocks and securities has become paperless and electronic, and the transaction process can be completed in an instant.

2. Instability

In the process of buying and selling various virtual capitals in the market, the price depends more on the subjective expectations of the virtual capital holders and participants in the rights and interests represented by the virtual capital in the future, and this subjective expectation depends on the macroeconomic environment, industry Many non-economic factors such as prospects, politics and the surrounding environment have increased the instability of the virtual economy.

3. High risk

Because there are many factors affecting the price of virtual capital, these factors themselves change frequently and impermanently, and do not follow certain rules. With the rapid development of the virtual economy, its transaction scale and transaction varieties continue to expand, making the existence and development of the virtual economy change. In addition, non-professionals are limited by professional knowledge, information collection, information analysis capabilities, funds, time and energy, etc., virtual capital investment has become a high-risk investment field.

4. Highly Speculative

Although the trading of fictitious capital such as securities, futures, and options can be used for investment purposes, it is also inseparable from speculation, which is determined by the needs of market liquidity.With the rapid development of electronic technology and network high-tech, the transfer of huge funds, liquidation and virtual capital transactions can be completed in an instant, which creates technical conditions and provides technical support for the high degree of speculation of virtual capital.

The Financial Bubble: To Kill It, You Must Make It Crazy
Anyone who blows soap bubbles will be attracted by its colorful splendor, and children will never get tired of it.However, we all understand that the bigger, rounder and more glamorous a bubble is, the closer it is to bursting, and this bursting is instantaneous.

Speculate in stocks to become shareholders, and speculate in real estate to become landlords.This is the image description of investors after the financial bubble burst.When the financial bubble was inflating, we could make money in almost everything. In the stock market, hundreds of stocks could go up in a day, and there were a lot of limit-ups.Fund sales have reached a crazy level, and even people who have no concept of funds are willing to invest and buy some.Retired people took out their pensions one after another, and seeing their neighbors buying them, they couldn't help but buy a few.A large amount of money poured into the stock market, causing the stock market to boom.Metal prices have also been rising, and futures have followed suit.People are hoarding until they sell off at a high level.Behind the price madness is a serious separation between price and value.

If God wants to destroy him, he must first make him mad.When several stocks have reached their daily limit for several times in a row, when the market value of a stock has a price-earnings ratio of several tens of times, when the price of a commodity that can be speculated has been fired to a very high position by speculators, The danger of the financial bubble bursting has quietly arrived.

Financial bubbles refer to the abnormal expansion caused by economic overheating, mainly manifested in real estate and stocks.The prices of the two often rise abnormally and sharply at first, and in the end, when their prices have seriously deviated from their actual values, they will inevitably lead to a sudden plunge in prices and a sudden contraction of assets, which will bring about a serious economic crisis.

Speaking of it, the financial bubble is not a new thing. As early as 400 years ago, the "bubble economy" appeared for the first time in Western Europe, but its main body is somewhat special. It is not the real estate and stocks that are common now, but beautiful tulips .

At that time, tulips were introduced to Western Europe from Turkey, and the Dutch who were good at developing soon cultivated more ornamental varieties of tulips.Rare things are more expensive, and the price of these tulip bulbs has also risen rapidly.Driven by profit, the bright flowers became the object of speculation, so that many people who had no direct relationship with the cultivation of tulips also participated in it, and many people really got rich overnight.If things go on like this, gradually spot trading has been difficult to meet the needs, so futures trading began to emerge again.Investors, male and female, old and young, were all full of red faces and full of expectations, hoping to make themselves millionaires with the help of the magnificence of tulips. For this reason, I don’t know how many people took out high-interest loans and gave it a go.

However, at this time the bubble economy suddenly showed its horror. On February 1637, 2, the price of tulips, which had seriously deviated from their actual value, became as terrifying as the devil overnight.On this day, people who hoped to get huge profits by selling tulips were shocked to find that the price of tulips fell sharply, and the market collapsed almost in a blink of an eye.Those who owed high debts to buy and sell suddenly became penniless, many committed suicide, and the society was in turmoil.The chaos of the situation plunged the entire Netherlands into an economic crisis, and Tulip staged a famous "bubble event".

After the "Tulip Incident", bubble incidents in the history of human economy occurred frequently.One of the largest soap bubbles to date occurred in Japan, starting in the late 20s.

At the time, Japan, a gigantic economy, was a smash hit.Here are just two examples to show how prosperous the market was at that time——

On the streets of Tokyo, people throw out a lot of money at every turn, and they want to take a taxi to Nagoya, which is 300 kilometers away. The annual income of taxi drivers in Tokyo can reach 1 million yen.

At that time, when college students were employed, there was a popular practice of "cutting the green wheat", that is, the company would sign a contract with the student when he was about to graduate, but he would not let the student come to the company for an internship, but send him to the beautiful Going on vacation in Hawaii - of course, in the name of "education".Why do companies do this?There is only one reason, that is, they are afraid that their talents will be snatched away by other companies.

Under this prosperous background, there is a huge economic bubble hidden.We have mentioned earlier that the protagonists of the modern bubble economy are basically real estate and stocks, and Japan is no exception.One of the most prosperous commercial streets in the world - Tokyo Ginza, at the peak of the bubble economy in 1989, its land price once reached 3.3 million yen per ping (1.2 square meters), and the land price of a Tokyo is equivalent to the entire United States land price.The reason for this phenomenon is that in the mid-20s, a large number of investors poured funds into the real estate industry, which caused Japanese land prices to soar wildly.Since 80, the land prices in the six major cities of Tokyo, Osaka, Nagoya, Kyoto, Yokohama, and Kobe have increased by double-digit percentages every year. The land price in Tokyo at its peak in 1985 was 1990 times that of 1983. "If you sell all the land in Tokyo, you can buy the United States", such remarks make most Japanese proud.In that era, the Japanese, who had always been pragmatic and disliked speculation and stocks, actually had more than half of their nationals bought stocks.Anyone who does not buy stocks is a fool, because a 2.5-year investment will have a 1% return.

(End of this chapter)