Ltcm (Long Term Capital Management)

Workshop 2, week 3 Syndicate 1 1. The f every(prenominal) flat of Trio jacket crown demonstrated the way in which sidestep cash in hand and neckcloths of remit silver tail be standardizedwise complex, unclear and lacking in transparency, special(prenominal)ly for retail investors. a. Briefly tot what has happened in the case of Trio Capital last year in 2012 in Australia The collapse of Trio Capital is the biggest A-oneannuation fraud in Australian history. Trio Capital was the trustee of a numbers of super cash governed by the APRA (Ryan, S. , 2011).It similarly had a number of managed investiture turning aways, like ARP Growth Fund and Astarra Strategic Fund. An Ameri arse lawyer, Jack Flader, controlled the hedge funds in the Caribbean in behalf of the society with the $180 cardinal from Trio Capitals schemes (Ryan, S. , 2011). When those funds collapsed, Australian investors funds disappeared. The union had very unretentive corporate governance, and at least one of the directors had fraudulent conduct and has asleep(p) to jail (Ryan, S. , 2011). Liquidators support record $300 million assets, barely more(prenominal) than $ 200million are still missing (Ryan, S. 2011). More than 6000 investors lost currency and near of them lost their entire retirement savings (Ryan, S. , 2011). And 5000 of those investors share $55 million levypayer-funded levy to compensate the loss (Ryan, S. , 2011). However more than 600 investors leave alone non get any compensation because the hedged funds they invested were self- managed and not governed by the APRA (Ryan, S. , 2011). 2. Discuss the regulations that were in place with regard to hedge funds in Australia and what the changes that are in place are.Firstly, Lacking of universal definition of hedge funds has been a trouble. Hedge funds know five remarkable char biteeristics defined by the regulations. According to Class Order CO 12/749 minist proportionalityn from the shorter PDS regime, a responsible entity using expression of hedge funds mustiness exhibit two or more characteristics from the following list (i) utilize of coronation strategies intended to puzzle imparts with low correlation to equity and confederation indices and/or complex investment structures (ASIC, 2012) (ii) Use of everage to increase returns (ASIC, 2012) (iii) Use of derivatives for conceptional purposes (ASIC, 2012) (iv) Use of short selling (ASIC, 2012) or (v) Performance fees (in contrast to fees ground on funds under management (FUM)) (ASIC, 2012). However, after the scale collapse of Trio Capital and different funds, hedge funds mangers aptitude guess to avoid labelled as hedge funds delinquent to ridiculous re allotation.Secondly, improving disclosure promote more efficient capital grocery, assist disclosure relevant information, reduce the possibility of omitting important information, concentrated on the information need of the investors, and be flexible to adapt investo rs information ask changes (ASIC, 2012). Under Corporations Act. 3 Pt 7. 9 requires the Product disclosure affirmation need to be prepared to the off-keyer of interests, and ongoing disclosure debt instrument and requirements on advertising and publicity for the offer of interests(ASIC, 2012) .In detail, PDS must (a) Be worded and presented in a clear, concise and effective manner (s1013C(3)) (ASIC, 2012) (b) Make specific disclosures (s1013D), including among other(a) things about the signifi fag endt fortunes associated with holding the product (ASIC, 2012) and (c) Include all other information that might reasonably be expected to stimulate a material influence on the decision of a reasonable mortal (when investing as a retail client) about whether or not to invest in the product (s1013E) (ASIC, 2012).In addition, Ch 5C has further requirements on hedge funds, including the alteration need to be label as a managed investment scheme operated by a responsible entity which holds an Australian fiscal work (AFS) licence, and to have a scheme constitution and compliance plan (ASIC, 2012). 3. Describe the roles of investment banks and merchant banks, with an emphasis on the record of their off -balance- weather woodworking plane phone line, in particular unitings and acquisitions. The merge and acquisition helpers income of the investment banks and merchant banks are large.In 2003 the radical amount of informatory fees that charged pass awayed $596 million in USA, suggesting that investment banks bring in a significant amount of income for providing M&A advice (Walter, Yawson & Yeung, 2007). The advisory services offered by investment banks usually related to various aspects of the acquisition and bargain of company and assets such as business valuation, negotiation, pricing and structuring of relationss, and procedure and death penalty (Water, et al. , 2007).One of the most important analyses is called dilution analysis, which requires updat ed skills about M & A accounting. Investment banks overly provide fairness opinions which usually involved documents attesting to the fairness of a act (Water, et al. , 2007). In any(prenominal) cases, firms interested in M & A advice go out contact an investment bank directly to process a transaction in mind. However, in the majority cases, investment banks pass on pitch ideas to dominance clients.After a general introduction of investment banks services in merger and acquisition, the specific roles will be provided below First, investment bank plays an advisory role for both defileers and sellers. When investment bank takes the role of an advisor to emf sellers, this is named as a sell-side engagement (Water, et al. , 2007). On another hand, when investment banks act as an advisor to the acquirers, this is called a buy-side assignment (Water, et al. , 2007). Other services hold advising clients on hostile takeovers, joint ventures, h, buyouts and takeover defense.Secondly , investment bank in like manner plays a due diligence role. Due diligence means gathering, analyzing and rendering the target companys financial information, compared with its historical and projected financial results, assessing potential synergies and evaluating operations to identify opportunities and challenges (Water, et al. , 2007). Due diligence is used to study the find and give client a true financial describe of the acquiring company. Clear the benefits and challenges of the transaction.Off balance sheet business means the business involved an asset or debt or financing activity is not record on the companys balance sheet (Wikipedia, 2013). For example, financial institutions have business like asset management or brokage service to their clients. The assets (often securities) usually belong to the clients directly or in trust, the company has no direct claim to these assets or has no direct obligation to these liabilities (Wikipedia, 2013). The company usually has responsible for some fiduciary duties to the client.Financial institutions may report off balance sheet items in their accounting statements or may overly refer to assets under management on off balance sheet items. Under current accounting rules, the accounting distinction between on and off-balance sheet items are quiet detailed and depend on the class of management (Wikipedia, 2013). In this case, investment banks help buyers and sellers to process the transaction in merge and acquisition. The assets and liabilities involved in merge and acquisition is directly controlled by the buyers and sellers rather than the investment banks.Hence these assets or liabilities should be recorded on the off-balance sheet of the investment banks. Syndicate 2 1. Describe the key factors, strategies that led to and the lessons acquire from the demise of Long Term capital Management. Provide a sketch summary of what happened and what were the strategies used by the fund. ( ,reference reading , reading ) Summary of what happened long-run Capital Management was a hedge fund management company that involves absolute-return trading strategies accompany with high leverage nature.The firms key hedge fund which called Long-Term Capital Portfolio initially succussed with after fees yearly returns over 40% in its first years. However due to the influences from Russia financial crisis and its high leverage, in 1998 it lost $4. 6 billion in less than quartette months. on that point were a wide go of companies and individuals affected by LTCMs loss. In order to prevent chain reaction, Federal Reserves financial intervention and other companies taken over required and the company unkindly down in early 2000. The strategiesInitially, the company use complex mathematical model to analyse fined income bond to demonstrate authoritative trade (usually find fault up American, Japan and European government bond) Government bond is a term contract, which means in the future, at a fix ed time, they will receive a fixed amount money. When the bond firstly issued, the residue of price has been minimised. Hence, according to economic theory, any price gasp will be fulfilled by arbitrary. The price difference between 30 years government bond and 29 times 9 month bind should be very small. And both of them will be age about 30years later.However these two bonds will have slightly difference due to liquid state difference. So through a serious of financial techniques, buy 29 year 9 month bond and sell 30 years bond before the 30 years bond comely issued, the profit becomes possible (Edwards, F. R. , 1999). But using the price difference and arbitrary was not sustainable. Hence the LTCM must use high leverage to generate more returns. In 1998, the company only had 47. 2 billion by them self, but financed funds about 1245 to 1290 billion, which means the leverage ratio exceed 25 (Edwards, F. R. , 1999).And the majority of the funds are invested in derivatives which i s extremely tough (Edwards, 1999). Lessons Limited leverage should be required for companies to reduce solvency risk. Arbitrary will not sustainable for the long period. The company lack of sustainable strategy. Disclosure of information is quiet important. This will reduce the investors gambling act and allow them realise the true risk. 2. Refer to the case of LTCM. Imitation is said to be the sincerest form of flattery. What problems does this create in financial markets? Does this cause financial market crises or is it only a problem when a crisis occurs?Problems Leverage ratio exceeds to 25, which is too high. Arbitrary is not sustainable, hence the long term investment strategy is absent. The funds amount is large hence it is difficult to reanimate the loss. This will increase the possibility of the financial crisis to happen. Because LTCM is extremely high risk company, even though all the companys partners are receive from worlds leading universities like MIT Harvard, and they have complex mathematic model, but its high leverage financing structure and business activity nature (e. g. edge, derivative) determined LTCM is an extremely high risk company. Those high-educated partners use other persons money to take risk without nominating the true risk. If the principal knows the risk, they might not invest in this company. As one company misfortune will cause others loss money. If the comparable investment strategies apply to all the companies in this industry, then the failure will expand to the whole industry, and have various chain reactions. Hence it is not only a problem when financial crisis occur, it actually will becomes the perpetrator to cause the financial crisis. . beg off the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth. Structure the medley of assets is wider same as the management styles range. Some portfolios are conservative and some are aggressive. Different structur e is aim to achieve different portfolio goals, timeframe and risk tolerance (ASX, 2013). Roles A management fund is a tool for investors to stack away wealth. Managed funds can invest in a portfolio rather than a single security.The portfolio assets include wide range of financial products like interior(prenominal) shared, international shares, fixed income securities, unlisted esoteric companies and specialist sectors (ASX, 2013). Thereby the variegation of the portfolio reducing the risk of single security falls. Also managed funds can provide professionally managed portfolio to meet the need of customers who do not have time or the skill to manage (ANZ, 2013). Also managed funds can be bought and sold freely on ASX like share, hence the liquidity risk is low, and if you need money you can immediate trade at current price (ASX, 2013).What is more, it could help start at small, which means investor can invest a small amount of money and reach the same diversification as the larg e amount money (ANZ, 2013). Operation Managed funds invest clients money on the behalf of clients. They generally put same appetite clients money together to the selected portfolio (ANZ, 2013). The portfolio assets include wide range of financial products like domestic shared, international shares, fixed income securities, unlisted private companies and specialist sectors (ANZ, 2013). Factors influence their rapid growthThere are four factors influence its rapid growth. Firstly, entry, exit and ongoing management fees reduce the return (ANZ, 2013). Secondly, diversification can limit portfolio risk but it may also dilute profits (ANZ, 2013). Thirdly, there might be more tax payment compared with funds managed by client themselves, or more adjustments make by the portfolio manager, more tax applies (ANZ, 2013). Fourthly, the owner lost control of the money (ANZ, 2013). Losing control of your money others may be involved in make decisions regarding where your money is invested. Refe rence ListANZ. (2013, March 15th). Managed Funds. Retrieved from http//www. anz. com/personal/ways-bank/work-life-financial/personal-finance/managed-funds/ ASIC (2012, September). Hedge funds Improving disclosure. Retrieved fromhttp//www. asic. gov. au/asic/pdflib. nsf/LookupByFileName/RIS-hedge-funds-published-18-September-2012. pdf/$file/RIS-hedge-funds-published-18-September-2012. pdf ASX. (2013) Managed Funds. Retrieved from http//www. asx. com. au/products/managed-funds. htm Edwards, F. R. (1999) Hedge Funds and the reveal of Long Term Capital Management, Journal of Economics