Bond Markets and Hedge Funds

Question: Describe about the Bond Markets and Hedge Funds. Answer: What is of more importance? Stock market or the bond market While watching the video, this video came in my mind again and again, and it would be most suitable to talk about this in this paper. After a thorough research, it could be found out that the debate regarding which market is bigger and better has been up for long but talking about my perception and as per the proofs with me, the bond market is undoubtedly greater than the stock exchange. There are some reasons for proving this assertion (Cheng, 2010). Firstly, let us talk about the size of each of these markets and after that, we can talk about other aspects of these two markets. As of today, the bond market is estimated to be more than mind blowing $82 trillion whereas on the other hand stock market is estimated to be around $40-$50 trillion. This estimated evaluation alone puts the bond market in the front seat as it is more than twice the size of the stock market which speaks volumes about the value of the bond market. Another important aspect is that bond market has a higher and larger number of issuers than the stock market. The different segments of issuers range from corporate, government, municipal, funding; mortgage supported, etc. Whereas the stock market has issuers from a particular set of corporate sector companies and for example, in the United States of America, there are around 17,000 enterprises of the public sector. One thing which cannot be neglected is that stock market is undoubtedly more influential on sentiments. Now for example, if someone asks what is the key indicator for the stock market? They will get an apt reply SP 500 or Dow most probably but on asking the same question for a bond market most of the people would remain clueless (e.g.,. Indexes such as Merrill Lynch Domestic Master) this gives the stock market a wider and broader voice and reach. Now once that has been discussed, as per my assumption bond market remains more powerful and influential than the stock market. The reason for saying so is that bond markets have a stable and fixed return guaranteed and hence, they are more predictable. Now if the yields are naturally high, then their does not generate a need for investing time and one in stocks. There is no similar risk reward. But yes, definitely if the yields are quite low in bonds then it would be wiser to switch to stocks. This is what gives the bond market the advantage as they are predictable and the customers can switch as per their ease but this does not work so smoothly in stock markets, and one does not have the privilege to predict stocks, and they are much more volatile. Hence, it can be said that this analysis is not a clear or high-end research work but still practically it is quite apt, and if this question is asked personally then definitely the answer would be that bond markets are much stronger and influential than the stock markets (Staff, 1995). It is also imperative to understand that both bond and stock markets are closely webbed, and most of the major stakeholders have a good hold in both these markets and keep shifting their funds from one to another as per the requirements. The stock market will always remain tempting and glamorous amidst the general masses but yes no doubt bond market will have greater influence as it comes with the benefit of stability and guaranteed returns and attracts more institutional cash. How do a hedge fund works This question has been pondering for a longer period but after watching the video, it certainly incited me to write about this issue the very first time when this question came across was when the opposition of Labour party in the UK accused the governing party of the Conservative party of giving away favours to its hedge fund managers. By the year 2015 since 2010, more than fifty percent of the cream layer of these hedge funds had donated their money to the Conservative party which when totalled estimates around Euro ten million. Since then and in past also, these hedge fund managers have been recognized as experts in investment skills and also known for their wealth. But how do these experts of investment work? Let us see in the subsequent sections. Well, it is peculiar to understand that rather than being recognized as an asset class, they are more correctly defined by the structure possessed by them. Hedge funds have a long history, and it all started when in the 1940's a man named Alfred Winslow Jones had set up an investment structure which helped him to bet for the fall as well as the rise of the prices and charge a small fee as his performance fee. It again got a boost in the late 1990's especially when George Soros speculation forced sterling out of the mechanism of the exchange rate, and he was dubbed as the man who broke the England bank (Clarke, 2007). Now talking about hedge funds in detail, they can be called as the pots of money which are opened or revealed only to a specific set of investors who usually use a set of complex instruments and strategies. In the beginning, they were assigned the job to produce an absolute or positive return in the market, and this had to be done by betting on falling prices and also for long shots by relying on the market for rising prices. Now, for example, a hedge fund can bet on BP, which is a big giant company in the sector of petroleum and oil by buying its shares and on the other hand shorting the market. This short allows the hedge fund to bet on an individual company and at the same time insulating the fund from the bigger risk of taking a loss due to a big decline in the market. More often than not, hedge funds try to exploit the small mispricing of the market which can pay off in a handsome amount only and only if the best are all leveraged. Most of the fund try and magnify their resource s by the help of borrowed money. It is peculiar to notice that this approached can be applied by the hedge fund owners for different types of markets ranging from shares, mergers, currencies and equity (Economist, 2015). To reflect the higher skill set, fund managers charge more than the mutual fund managers. Conventionally these hedge fund managers earn a two and twenty" i.e. a 2% annual charge from the capital which is under management and a performance fee of twenty percent from the profits earned and this is the reason why so many hedge fund managers are rich as they get a handsome amount for the duties they impart (Gad, 2013). But now a lot of things have been changing as the regulators are keeping a closer eye on these managers and even the investors have started demanding for much lower fees especially due to recent performances with average results from these managers. (www.forbes.com) Conclusion Hence, in the end, it can be said that bond markets are more important than the stock market if not on scientific research methods then at least as per the practical and available arguments. Secondly, the hedge fund owners have been getting a lot of money because of the policy of two plus twenty which gives them handsome amount of payback References Cheng, L. (2010, August 12).Which is more important the stock market or the bond market?Retrieved July 3, 2016, from https://larrycheng.com/2010/08/11/which-is-more-important-the-stock-market-or-the-bond-market/ Clarke, M. (2007, March 27). How hedge funds work.Investing. Retrieved from https://www.thisismoney.co.uk/money/investing/article-1600380/How-hedge-funds-work.html Economic Importance of the Corporate Bond Markets. (2014). Retrieved July 3, 2016, from file:///C:/Users/HP/Desktop/New%20folder/Corporate%20Bond%20Markets%20March%202013.pdf Economist, T. (2015, March 30).How hedge funds work. Retrieved July 3, 2016, from https://www.economist.com/blogs/economist-explains/2015/03/economist-explains-16 Ferguson, N.Ascent of MoneyRetrieved from Furlong, M., Co-founder. (2015, February 17).Hedge fund investing overview: What you need to know. Retrieved July 3, 2016, from All Posts, https://www.slicedinvesting.com/learning/finance/hedge-fund-investing-overview-need-know Gad, S. (2013, October 22). What are hedge funds?Forbes. Retrieved from https://www.forbes.com/sites/investopedia/2013/10/22/what-are-hedge-funds/ Staff, M. F. (1995).5 bond market facts you need to know -- the motley fool. Retrieved July 3, 2016, from https://www.fool.com/knowledge-center/5-bond-market-facts-you-need-to-know.aspx