GS 2 Flashcards
What are the main lines of differences between hedge fund and mutual fund?
1) Compensation
2) Initial investment
3) Lock-up period
4) Strategies used
5) Size and AUM
6) Criteria for investors
7) Regulation
8) Disclosure
Why hedge funds can reduce mispricings more efficiently than mutual funds? Why hedge funds are market-neutral.
Hedge funds use derivatives and short-selling to aggresively correct mispricing by locking in profit and hedging from other market movements
What are 4 hedge fund strategies?
1) Long-short equity
2) Event-based
3) Fixed-income arbitrage
4) Macro strategy
What are the problems with assessing hedge fund performance?
1) Voluntary disclosure - survivor bias
2) Hard to value positions in complex derivatives
3) Hard to value inherent low-tail risk
4) Past performance is biased view on hedge fund risk (think LTCM)
What are the risks for the economy from hedge funds?
1) Investor protection (10% HFs go bust every year)
2) Adding excess volatility and price overreaction to the market
3) Risks to the financial institutions (credit exposure)
4) Liquidity risks
What is the future of hedge funds?
1) More regulation
2) More funds chasing same arbitrage - less profits, more activism
3) Less discretion for HFs as they get institutional investors
What are the built-in mechanisms for Bitcoin?
1) Reward honest participation
2) Bootstrap acceptance by early adopters
3) Guard against concentration of power
What are Bitcoin’s design principles?
1) Absolute scarcity of money supply
2) No centralized authority to distribute coins
3) System of bookkeeping that verifies transactions
What are Bitcoin’s enabling technologies?
1) Blockchain
2) Cryptography
What are Bitcoin intermediaries?
1) Currency exchanges
2) Mixers
3) Miner pools
4) Digital wallets
What are the three phases of use of Bitcoin?
1) Illegal (early)
2) Consumer payments, buy-and-hold (now)
3) Mainstream source of value and technology of payment (future)
What are the risks of Bitcoin?
1) Value risk
2) Shallow market risk
3) Operational risks (malware, attacks)
4) Frozen account risk (e.g. legal stuff)
5) Privacy risk
6) Transaction risk (irreversible)
7) Counterparty risk (currency exchanges might die without reimbursement)
What are the aspects of Bitcoin regulation?
1) Fighting Bitcoin-specific and Bitcoin-facilitating crime
2) Consumer protection
3) Regulatory options (impose constraints, impose taxes, etc.)
List 4 reasons why Bitcoin can be called a Social science laboratory
1) Bitcoin as a financial asset
2) Incentive-compatibility in Bitcoin protocol
3) Privact and anonkmity
4) Monetary policy
List 4 key sources of fragility of pre-crisis financial system
1) Badly supervised BS of largest banks
2) Run-prone design
3) Weak regulation of OTC derivatives
4) Reliance on market discipline
Why pre-crisis financial regulation was so inefficient?
1) SEC mission was to protect customers
2) Reliance on market discipline
3) Too hard to understand all risk accumuated in complex securities
4) Underestimating disaster risks
What are the 2 risks of financing ton of securitized assets with very high leverage?
1) Creditor runs
2) Fire-sale losses
What were regulatory responses to short-term high leverage problem
1) Surviving IBs took banking charters and got supervised by Fed, not SEC
2) Elimination of tri-party short-term credit provision
3) Bank capital requirements are stricter
What were regulatory responses to the swap issue?
1) All transaction are done through central counterparty (clearinghouse)
2) Minimum capital and credit requirements
What were 2 wrong assumptions when relying on market discipline?
1) Markets will always self-correct
2) Banks internal risk control will be enough, banks will prioritize risk control over profits
Overall, what are the 4 main reasons why financial system got so screwed in the crisis?
1) Undue reliance on market discipline
2) Failure of SEC to prioritize financial stability
3) Financial firms grew enormous balance sheet on very high leverage
4) Creditors supplied cheap credit to banks since believed that they won’t be allowed to fail
What were 4 main regulatory changws after the crisis?
1) US banks are now under Fed supervision
2) Improvement in capitalization of largest financial institutions
3) Reduction of unsafe practices with derivatives
4) New failure resolution methods
What are the remaining challenges in financial stability?
1) No plan if CCPs fail
2) CCPs are new “too big to fail”
3) Regulators can become lax as memory of the crisis fades
What are the benefits of Algorithmic Trading (AT)?
1) Lower costs
2) Less human error
3) More productivity
What are the 3 financial developments that supported rise of AT?
1)
