Home Hedge Funds Hedge Funds Are Dealers Now

Hedge Funds Are Dealers Now


In the olden days, there were two sorts of people who traded stocks or bonds for a living. We can call them “dealers” and “investors,” though those terms are imperfect. An investor is someone who buys stocks or bonds because she thinks they are a good investment, and sells them when she thinks they aren’t. She does analysis, decides that Bond X is worth $80, sees it trading at $78, and goes out to buy some Bond X. When it trades up to $82, she sells it. She makes her money by buying low and selling high, by predicting price trends or understanding fundamental value. Investors include ordinary retail investors, but mutual funds and hedge funds are also in this category. Their job is to buy stuff that they think will go up.

A dealer is the person the investors buy from and sell to. A dealer is not looking to buy stocks or bonds that she thinks are a good investment, or to sell ones that she thinks are a bad investment. A bond dealer has some list of bonds, and she is always willing to buy or sell each of those bonds. She is in a customer service business: Customers come to her looking to buy or sell bonds, and she sells them the bonds they want to buy and buys the bonds they want to sell. She makes money not by predicting price moves but by charging the customers (investors) a bit of money (called the “spread”) for each trade, buying from them at a lower price (her “bid”) than she will sell to them (her “offer” or “ask”). An investor thinks “Bond X trades at $78 and is worth $80, so I will buy it.” A dealer thinks “Bond X trades at $78, so I will buy it at $77.75 or sell it at $78.25, whichever customers want.” She doesn’t care what it’s worth. She cares about charging a bit more to sell than she pays to buy.

Source link


Please enter your comment!
Please enter your name here