@all, please explain these two terms, short-selling and hedge fund. I dont quite get the concept.

Thanks.

Definition of 'Short Selling'

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.



Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.

Definition of 'Hedge Fund'

An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.



For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.   

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

(Culled from Investopedia)

deenee: Definition of 'Short Selling'

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.



Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.

Definition of 'Hedge Fund'

An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.



For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.   

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

(Culled from Investopedia)

Thanks for this.

Do we have firms that do this hedge fund of a thing in nigeria, and if there are, what is the minimum net worth for investors? ( that of U.S is 1 million dollars as stated in the quoted post)

[b][/b]

nitrogen:

Thanks for this.

Do we have firms that do this hedge fund of a thing in nigeria, and if there are, what is the minimum net worth for investors? ( that of U.S is 1 million dollars as stated in the quoted post)

Deenee, quite some time. Lucid explanation you got there.

Nitrogen, HFs will be introduced into naija's market very soon. That is if it has not been introduced sef. See the statement made by an engineer turned NSE Boss, Oscar Onyeama. 'He also promised that his management would encourage and support the introduction of Hedge funds into Nigerian capital market'. http://www.marketnewstv.com/news/NSE-News-Room/993.html.

As Denee noted, hedging is one of the ways of mitigating risk. Others are insurance, diversification. The CFA people learned that it is better to build a portfolio of assets whose returns are negatively correlated because this leads to the shrinkage of the overall risk, or variance, of the portfolio. In simple terms, this means that if A, B, C represent the returns of three risky assets a, b and c, then these assets are excellent candidates for a 3-asset portfolio when Covariance (A, B)<0, Covariance (A, C)<0 and Covariance (B, C)<0. The more assets satisfying this condition, the better for your portfolio. In fact, it is possible that the risk of a>4%, risk of b>5%, risk of c>4.5%, but the right combination of these assets yields a portfolio with risk (a,b,c)<2%. That is a magic of hedging.

Diversification, on the other hand, is not always the way that people make it seem. In addition to increasing the number of assets in your portfolio, diversification requires that the assets in your portfolio have very little or no correlation at all. Industry people, deenee can confirm this, believe that a well diversified portfolio has 30 assets or below.

There is another very important concept that is tested by quantitative analyst. We call it causality or Granger causality, due to Granger who won the Nobel prize for his work in Economics. We say A Granger causes B if B depends on the previous value of A. The idea of causality is hardly discussed by industry people, but it is a very well discussed concept in the world of academics.

There is a field called quantitative hedging theory. It has other theories embedded in it and it's a very huge field on its own. I so much love this field.

T22

PS: The direction of covariance trivially determines the direction of correlation. This can be easily shown, but I will not supply the proof unless you really need it. Industry people hate us; they hate proofs.hahahahaha

I hope hf is introduced soon(2-3 yrs) for naija guys in the Ib world to explore.

@T22,
the direction of covariance determines the direction of correlation through the determination of the relationship between the performances of the securities.
Thus, we have coefficient of correlation which is the covariance of the securities divided by the product of all the standard deviations of the securities.
Portfolio theory, huh, i did a bit of it in school and thats an aspect of finance management that i really like.

Nb: not tryn to prove anything o, have not gotten to that level.
Btw,did u see my mail.

Hedge funds will not be introduced in Nigeria anytime soon. There is no liquidity in the capital markets, no accountability, no transparency nothing. No sane individual will run a hedge fund focused on the NSE and Mr. Onyema cant change that. The capital market is way too undeveloped

@ cityofsin, you are quite correct, HFs will not be introduced any time soon due to the aforementioned factors that you have already cited. It pains my heart but this is the hard and bitter truth because there is dearth of technology, human capital and issues related to corporate governance. We can only hope that things will change for the better.

@tanimola22 , I am doing great, I have been doing a lot of travelling recently and in officiating capacity hence my unexplained silence. Hope you are good?

cityofsin: Hedge funds will not be introduced in Nigeria anytime soon. There is no liquidity in the capital markets, no accountability, no transparency nothing. No sane individual will run a hedge fund focused on the NSE and Mr. Onyema cant change that. The capital market is way too undeveloped

So sad, i hope things get better soon.

deenee: @ cityofsin, you are quite correct, HFs will not be introduced any time soon due to the aforementioned factors that you have already cited. It pains my heart but this is the hard and bitter truth because there is dearth of technology, human capital and issues related to corporate governance. We can only hope that things will change for the better.

@tanimola22 , I am doing great, I have been doing a lot of travelling recently and in officiating capacity hence my unexplained silence. Hope you are good?

Yeah, am very good. I can see you are not far from leadership. All the best.

nitrogen: I hope hf is introduced soon(2-3 yrs) for naija guys in the Ib world to explore.

@T22,
the direction of covariance determines the direction of correlation through the determination of the relationship between the performances of the securities.
Thus, we have coefficient of correlation which is the covariance of the securities divided by the product of all the standard deviations of the securities.
Portfolio theory, huh, i did a bit of it in school and thats an aspect of finance management that i really like.

Nb: not tryn to prove anything o, have not gotten to that level.
Btw,did u see my mail.

Your intuition is right.

Hedge funds are not likely to operate in Nigeria anytime soon. Mostly because the exchange and clearing systems aren't up to standard and investors are likely to encounter severe liquidity issues.

As Denee noted, hedging is one of the ways of mitigating risk. Others are insurance, diversification. The CFA people learned that it is better to build a portfolio of assets whose returns are negatively correlated because this leads to the shrinkage of the overall risk, or variance, of the portfolio. In simple terms, this means that if A, B, C represent the returns of three risky assets a, b and c, then these assets are excellent candidates for a 3-asset portfolio when Covariance (A, B)<0, Covariance (A, C)<0 and Covariance (B, C)<0. The more assets satisfying this condition, the better for your portfolio. In fact, it is possible that the risk of a>4%, risk of b>5%, risk of c>4.5%, but the right combination of these assets yields a portfolio with risk (a,b,c)<2%. That is a magic of hedging.

I think many people are learning not to construct portfolios using Covariances, standard deviations or correlations as a measure of risk. This is mostly because those risk measures aren't stable over time. For instance, correlation in equity classes will increase during high volatility regimes before eventually reverting to their long run mean over time. Many people learnt that bitter lesson in 2008!

Hedge Funds typically reduce their risk with equity derivatives like futures and options. Say for instance you buy 100 shares of Apple and sold 1 contract of Apple call options, you risk reward will be higher than the guy who just bought 100 shares of Apple stock. Hedging with Equity derivatives is one aspect that is very promising for individual investors that can learn the ropes.

violent:
Hedge funds are not likely to operate in Nigeria anytime soon. Mostly because the exchange and clearing systems aren't up to standard and investors are likely to encounter severe liquidity issues.




I think many people are learning not to construct portfolios using Covariances, standard deviations or correlations as a measure of risk. This is mostly because those risk measures aren't stable over time. For instance, correlation in equity classes will increase during high volatility regimes before eventually reverting to their long run mean over time. Many people learnt that bitter lesson in 2008!

Hedge Funds typically reduce their risk with equity derivatives like futures and options. Say for instance you buy 100 shares of Apple and sold 1 contract of Apple call options, you risk reward will be higher than the guy who just bought 100 shares of Apple stock. Hedging with Equity derivatives is one aspect that is very promising for individual investors that can learn the ropes.

Indeed you are not wrong. There are many reasons why standard deviation is a poor measure of risk. Very many that I can't begin to list right now. Of course, all what you stated, and many others, are under hedging theory, which I happen to have a deep research interest in. Of course, there are other time varying measures of risk based on the so called dynamic risk measures of non-truncated sequential sigma algebras . However, the idea was to clarify the intuition behind risk hedging for the OP to understand in the simplest term possible.

Thanks for pointing that out though. At least, the OP can now know that everything does not end in variance-covariance matrix of asset returns.

T22.

Of course, there are other time varying measures of risk based on the so called dynamic risk measures of non-truncated sequential sigma algebras

^^^

u wan blow my head?

Wow,
This thread is for mature mind ooo
U̶̲̥̅̊ guys are making sense,and Ȋ̝̊̅ salute u,ten million times
A̶̲̥̅♏ fresh graduate and wi like to start M̶̲̥̅γ̲̣̣̥ career I̶̥̊n̶̲̥̅̊ trust and securities ltd company,is thr anyone here that can help out.
Yinka_w@yahoo.com

Subscribing! Worked in IB in the UK for 5 years now but considering a move back home. Would be interesting to follow this thread. I have to say though that the pay I have heard is not very inspiring but home is home, I guess.

Please, i need to ask this, 'must one be skilled in financial modelling(using excel or any other program) in order to be succesful in finance? Cos that has been bothering me all this while.

nitrogen: Please, i need to ask this, 'must one be skilled in financial modelling(using excel or any other program) in order to be succesful in finance? Cos that has been bothering me all this while.

They are not that hard. With your strong background in acconuting, you can learn them well in 2 months. Don't panic! After more than 6 months of practice, you become a professional.

T22

tanimola22:

They are not that hard. With your strong background in acconuting, you can learn them well in 2 months. Don't panic! After more than 6 months of practice, you become a professional.

T22

Thanks.

Btw, i just sent a mail to you.

tanimola22:

They are not that hard. With your strong background in acconuting, you can learn them well in 2 months. Don't panic! After more than 6 months of practice, you become a professional.

T22

Please where can I learn financial modeelling in lagos.
Also,how feasible is self directed learning of financial modelling?

adeprof:

Please where can I learn financial modeelling in lagos.
Also,how feasible is self directed learning of financial modelling?

Hi,

If you can approach any financial analyst in Lagos, then you can learn it for almost free of charge.

The best way I would suggest is that you learn it online. There are countless websites where you can learn yourself.

T22.

violent:
I think many people are learning not to construct portfolios using Covariances, standard deviations or correlations as a measure of risk. This is mostly because those risk measures aren't stable over time. For instance, correlation in equity classes will increase during high volatility regimes before eventually reverting to their long run mean over time. Many people learnt that bitter lesson in 2008!

The Sharpe ratio is there for a reason. And one of the variables in the equation is sigma

candylips:

The Sharpe ratio is there for a reason. And one of the variables in the equation is sigma

Although it has its few shortcomings, I would always prefer the Sortino ratio to the Sharpe ratio as a measure of performance.

T22

Ok, here we go. I am thinking of helping an undergraduate student in Nigeria with her project. We plan to investigate Modern Portfolio Theory using portfolio of riskless and risky assets-stocks and bonds. My issue is this. Is there a website where I can download daily stock prices of major listed companies in Nigerian Stock Market by industries. Access to Nigerian government bond historical data is equally important to me-not that Nigerian govt bond is any where near riskless but will try to work with it(it is actually junk status).

Please anybody that knows where I can get this info should help. For companies in USA, yahoo finance will do and the treasury data I can get also. It will be interesting to compare investment in the same industries in Nigeria and USA using ideas from Modern Portfolio Theory. Most of the codes will be done in R. Thanks.

Ajo Mmuo: Ok, here we go. I am thinking of helping an undergraduate student in Nigeria with her project. We plan to investigate Modern Portfolio Theory using portfolio of riskless and risky assets-stocks and bonds. My issue is this. Is there a website where I can download daily stock prices of major listed companies in Nigerian Stock Market by industries. Access to Nigerian government bond historical data is equally important to me-not that Nigerian govt bond is any where near riskless but will try to work with it(it is actually junk status).

Please anybody that knows where I can get this info should help. For companies in USA, yahoo finance will do and the treasury data I can get also. It will be interesting to compare investment in the same industries in Nigeria and USA using ideas from Modern Portfolio Theory. Most of the codes will be done in R. Thanks.

I advice you to hook up with an analyst who has NSE data password. You should get the stock info you need from the NSE website if you can get the password. I can't remember the password I used to use again.

T22.

tanimola22:

I advice you to hook up with an analyst who has NSE data password. You should get the stock info you need from the NSE website if you can get the password. I can't remember the password I used to use again.

T22.

@tanimola22 thanks for responding.... I do not know anyone with NSE password and I am currently not in Nigeria. Can you assist further please?

@ Ajo Mmuo try bloomberg, datastream, thomson reuters and datamonitor. These firms compile data periodically and I am certain that you will be able to get the information you require from them at an affordable cost. You can also get some relevant information from the MPR articles up loaded on the CBN website. You may also speak to a registered stock broker and dealing member of the NSE if you still require any info from them. One down side though with NSE data is that they don't update it regularly. All the best.

Ajo Mmuo:
@tanimola22 thanks for responding.... I do not know anyone with NSE password and I am currently not in Nigeria. Can you assist further please?

As you are not in Nigeria, the advice given by @Deenee is on point. Meanwhile, it is better for you or your student to speak to the librarian at your university or his/her university. Most schools have access to Bloomberg data. I don't know your pocket, but if 1500USD/month sounds trivial to you, then you can sign up with Bloomberg to gain personal access to the requisite data and even more. Datastream costs around half of the cost of Bloomberg per month. Thomas Reuters and Datamonitor should cost around (800USD, 1500USD)/ month. I am not too sure though. I gave you the NSE option because it is way cheaper.

Anyway, you may send me an email. I will then send you someone's email. The dude has ran to oil and gas, but I guess he should still have the NSE password. I am not sure though. Better still, as already suggested, you could speak to a stockbroker if you have one.

If you choose the route of contacting me, then the subject of your message should be Markowitz Portfolio Theory.

T22.

deenee: @ Ajo Mmuo try bloomberg, datastream, thomson reuters and datamonitor. These firms compile data periodically and I am certain that you will be able to get the information you require from them at an affordable cost. You can also get some relevant information from the MPR articles up loaded on the CBN website. You may also speak to a registered stock broker and dealing member of the NSE if you still require any info from them. One down side though with NSE data is that they don't update it regularly. All the best.

@deenee thanks for your time but are you by the above saying that I can access daily closing prices of say Cadbury Nigeria or Zenith Bank on Bloomberg as traded in Nigerian Stock Market for say the last 10 or 5 years? Sorry, I do not know what relevant information that I can get from the MPR articles on the CBN website. You care to explain further? Aside the stock closing prices, I do need access to Nigerian govt. bond daily closing prices. Can I get these on Bloomberg or the other websites you mentioned too? I should have access to Bloomberg where I am. I would check it out tomorrow-Jun 4th-through some Unis around me.

tanimola22:

As you are not in Nigeria, the advice given by @Deenee is on point. Meanwhile, it is better for you or your student to speak to the librarian at your university or his/her university. Most schools have access to Bloomberg data. I don't know your pocket, but if 1500USD/month sounds trivial to you, then you can sign up with Bloomberg to gain personal access to the requisite data and even more. Datastream costs around half of the cost of Bloomberg per month. Thomas Reuters and Datamonitor should cost around (800USD, 1500USD)/ month. I am not too sure though. I gave you the NSE option because it is way cheaper.

Anyway, you may send me an email. I will then send you someone's email. The dude has ran to oil and gas, but I guess he should still have the NSE password. I am not sure though. Better still, as already suggested, you could speak to a stockbroker if you have one.

If you choose the route of contacting me, then the subject of your message should be Markowitz Portfolio Theory.

T22.

Thanks once more... I will try the Bloomberg route. I should have access to it through some Unis around me. Hopefully, I will do that tomorrow. I never really thought I could access daily closing prices of Nigerian companies trading in Nigerian stock market there. I never checked either. I normally use Yahoo finance and couldn't get Nigerian companies there. Anyways, thanks for assisting. I hope I will succeed with Bloomberg et al, otherwise I will get back to you asap.

@ Ajo M, apologies for the delayed response. Somehow, your question just fell through the "cracks". Yes, I am certain that you will be able to get the data you have stated herein. There is however a "caveat", if you intend to make use of the Bloomberg terminals at the universities around you. The kind of information you will have access to will be largely determined by the subscription package paid for. There are some that would pay for country specific, sector specific, transaction specific information so you might want to consider this. But over all, the aforementioned firms should be able to provide the data you need. The can also offer you bespoke services tailored to meet the data requirements you want. The MPR articles relate to the bond aspect of the project as it is through this that the CBN sets interest rates which have a bearing on the movement of bond prices and other related factors. All the best!