The term derivative instrument is generally accepted to mean a financial instrument with a pay off structure determined by the value of an underlying security, commodity, interest rate or index.
Derivatives are used to lower funding costs by borrowers, to efficiently alter the proportions of fixed to floating rate debt, to enhance the yield on assets, to quickly modify the assets' payoff structure to correspond to the firm's market view, to avoid taxes and skirt regulations, and, perhaps most importantly, to transfer market risk (hedge)-where the term market risk is used to connote the possibility of losses sustained due to a foreseen price or volatility change. A firm may execute a derivative transaction to alter its market risk profile by transferring to the trade's counterparty a particular type of risk. The price that the firm must pay for this risk transfer is the acceptance of another type of risk and/or a cash payment to the counterparty.
Please tell me more about the use of derivatives ?
A relatively recent, but extremely important class of financial assets is derivative securities, or simply derivatives. These are securities whose prices are determined by, or "derive from," the prices of other securities. These assets are also called contingent claims because their payoffs are contingent on the prices of other securities. Because the value of derivatives depends on the value of other securities, they can be powerful tools for both hedging and speculation. The two basic types of derivative instruments are options contracts and futures contracts.
An option contract gives the owner of the contract the right, but not the obligation, to buy (sell) a financial asset at a specified price from (or to) another party. The buyer of the contract must pay the seller a fee, which is called the option price (or premium).
A futures contract is an agreement whereby two parties agree to transact with respect to some financial asset at a predetermined price at a specified future date. One party agrees to buy the financial asset; the other agrees to sell the financial asset. Both parties are obliged to perform, and neither party charges a fee.
Transactions using derivative instruments are not limited to financial assets. There are derivative instruments involving commodities and precious metals. Derivative markets can be used by money managers to quickly and efficiently control certain risks associated with a portfolio of financial assets.
Q. Please tell me more about hedge funds ?
Mention "hedge funds" and even people who say they know nothing about them will associate them with George Soros. They might even know that his Quantum fund famously made US$ 2 billion from sterling's ejection from the Exchange Rate Mechanism in 1992. Others may recall the 1998 near collapse of Long Term Capital Management which threatened the world's financial system. But contrary to popular belief, most hedge funds are highly risk averse, many have no borrowings and they do actually hedge (as in hedge their bets). They are also quite varied. The Quantum and LTCM funds may be notorious but they are also a typical of hedge funds. Most hedge funds are limited in size. Most are relatively small, with the vast majority less than US$ 100m in invested capital. There are only a few dozen larger than US$ 1 billion, and a small handful that exceed US$ 5 billion.
But what is a hedge fund ? Broadly, speaking, a hedge fund includes any pooled investment vehicle that is privately organized and not generally available to the public. The key priority of these funds is to minimize investment risk in an attempt to deliver profits under all market conditions.
Most commonly, hedge funds are organized as limited partnerships or limited liability corporations, and are often engaged in active trading of securities, commodities, currencies and related derivatives. They seek above average returns through superior portfolio management with investors taking a percentage of the profits.
It is hard to generalize as hedge fund strategies vary enormously in terms of investment returns, volatility and risk. But one thing most hedge funds have in common is the fee structure; they generally charge a flat fee, typically, one to two per cent per annum, plus a performance fee, which could be anything from 20 per cent to 25 per cent of new net profits.
To understand hedge funds it is important to grasp the notion of going 'short.' Conventional fund managers go 'long'; that is, they buy shares or bonds in the hope that the prices of these will rise so that they see a profit. If the prices fall, however, a loss is recorded. A fully invested conventional portfolio is said to be 100 per cent long in its exposure to the stock or bond market.
When going short, a profit is achieved when the share price falls (or a loss is recorded if a share price rises). To go short, a hedge fund manager must borrow shares from a third party which are then immediately sold in the stock market. The hedge fund manager has to return the borrowed shares to the lender at a later date. To do this, he must buy back the shares in the stock market. If the share price has fallen and the shares can be purchased at a lower price than at which they were sold, a profit is achieved. On the other hand, he will suffer a loss if the price paid to repurchase the shares is higher than that received when the shares were sold.
The hedge fund will pay interest to the stock lender when borrowing the shares and is also obliged to make good any dividends which the lender would have received.
Long/short equity hedge funds combine long positions in some shares and short positions in others. Profits are made when share prices of long investments rise and prices of shares sold short fall. Conversely, if this happens the other way round and share prices of long investments fall or prices of shares sold short rise, losses are suffered.
There are a number of different hedge funds available. Arbitrage hedge funds exploit anomalies between the prices of two related securities. The simplest arbitrage involves the shares of a company which might be quoted on two different stock exchanges.
For example, ABC shares are quoted on the New York stock exchange and the London stock exchange. Prices might be marginally different owing to local factors so it might be possible to buy ABC shares in New York for $10 and sell them short at the same time in London for $10.10. If the price then equalizes at $10.05, shares can be sold in New York (realizing a 5 cent profit) and simultaneously bought back in London (realizing another 5 cent profit). If the number of shares bought and sold is the same, the long and short exposures are at all times equal.
The net exposure to the market is zero and the profitability of the strategy is unaffected by the overall trend in the stock market. This arbitrage strategy is market neutral but there are others available, such as fixed income, convertible bond, mortgage bond and risk arbitrage. Many of them use leverage to increase returns, borrowing money to increase their exposure. But be warned: leverage is a source of risk and needs to be monitored closely.
Q Why is NDC Investments located in Singapore?
In April 1997 when NDC Investments, formerly The Nippon Derivative Consultants, was set up ( prior to the introduction of the Japanese version of the Big Bang), it was impossible to set up a company similar to NDC in Japan. The operating costs in Japan were too high and the regulations too stringent making it too difficult to manage a hedge fund like Derivative Arbitrage Fund.
Hence after careful consideration of the regulations, costs, geographical location, distance from Japan, time difference, taxation system, telecommunication, infrastructure etc, Singapore was a best-suited location for the establishment of our company.
Q Please explain the risk control system of your hedge fund?
There are three levels of risk controls e.g. risk control designed by the fund, fund manager's internal risk control and external risk control by independent third parties of the Derivative Arbitrage Fund.
1) Risk control designed by the fund
- Diversification investments in numerous different strategies.
- In principle, long and shirt positions are taken simultaneously ( market neutral )
- Calculation of risk tolerance based on through simulation
2) Internal risk control
- Internal rules for constructing positions ( control of leverage)
- Allocation of funds that minimize the risk of price volatility.
- Systematic investment system under strict rules
3) External risk control
- Checking of trades and positions by administrator
- Administration of cash and assets by administrator
- Monitoring of leverage level by prime broker
- Checking of portfolios and NAV by investors
- Annual audit of qualified auditor
Through the above various risk control systems, NDC provides a very transparent investment services to our clients.
< page link> This page contains the website information of all NDC's related companies.
Shareholders:
< Nippon Venture Capital Co., Ltd.>
One of the largest venture capital firms in Japan. Below is Nippon Venture Capital ( NVCC)'s website.
http://plaza12.mbn.or.jp/~nvcc/
< MVC Corporation>
A major capital venture company under Mitsui & Co., Ltd. Below is MVC's website.
http://www.mvc.co.jp
We will add more new linked websites in the future. Please revisit this section.
(Message from website administrator) We welcome request for mutual linkage of websites. We would be very grateful if you could send your request to:
ndcpl@pacific.net.sg
< What's New? corner>
Commencement of investment consultancy by NDC Investments
Apart from fund management, NDC Investments is developing its other sources of revenue in various consulting businesses. Investment consultancy is our company's first step into this new arena. We will introduce hedge funds based in Hong Kong and Singapore investing in Asian stocks to Japanese institutional investors. Our President & C.E.O. , Mr. Akira Sunaga said " Currently ,there are limited hedge funds investing in Asian stocks. The Japanese institutional investors are always searching for excellent fund managers. I estimate demand for this business is higher than expected. The prospect for this business is very good with excellent growth potential. In the future, we are planning to introduce excellent funds not only to Japanese institutional investors, but to European and US investors as well." So please keep up with the development of NDC Investments' new businesses.
< download> You can download the company brochure of NDC Investments and the brochure of Derivative Arbitrage Fund here.
The file is in PDF format. Adobe Acrobat Reader Ver.4.0 and above is necessary to open these files. You can download " Acrobat Reader" by clicking on the icon below if necessary.
" Recruitment information of NDC Investments"
NDC Investments does not recruit fresh graduates at regular intervals. However, job vacancies for excellent fresh graduates and experienced staff are always open. There is no restriction on age, sex, race and etc. Especially, applicants with excellent trading ideas, high fighting spirit will be compensated handsomely. If you think you are the right person for our company after visiting our website, please e-mail your resume to us.
Other requirements:
Well-versed in English (native speaker level), knowledge of Japanese and other languages will be an advantage but not a pre-requisite.
Able to work in Singapore. ( At present, we have no representative office in Japan)
Capable, eager to learn, positive, high potential applicants are welcome.
Applicants who fulfill the above requirements will be considered. Age, sex, race, academic background, experience are not important.
< Information of seminar> This corner contains all the information about seminar presented by NDC Investments .
Presently there is no schedule for seminar. Please revisit this page .
