Randomly Noted

In my travels around Asia the past couple of weeks, I’ve been meeting with various banks and investors to learn more about the FX market in connection with our big initiative there. Stopped in to see a decent sized U.S. hedge fund and was fascinated by the investment strategy.

Among other tings, these folks invest in convertible bonds issued in local currencies in home countries. They end up with three factors that can affect returns: credit exposure, changes in interest rates and changes in currency values. The manager relayed an interesting anecdote that explained the benefit of such a strategy: the bond and underlying stock hadn’t moved much in price but the currency had to the point it allowed him to convert the bonds into stock and then sell the stock, convert the currency to dollars and make a handsome return. In other words, currency fluctuations in transactions like this can help take an out-of-the-money convertible and all of a sudden bring it in the money.

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The SEC alleges Goldman's work on a CDO enabled something else

It’s hard to say that the structured financing transaction at the heart of latest Wall Street scandal was what ultimately led to the credit crisis. But this transaction did involve a number of banks with financial ties to the deal that ultimately had to be bailed out.

This latest Wall Street drama has also dragged into it two of the biggest players on both sides of the financial markets – Goldman Sachs and hedge fund Paulson & Co.

The Securities and Exchange Commission today charged Goldman with fraud because it said the firm and an employee knowingly created a deception that allowed Paulson to make a billion dollars. The story involves some other favorite bad guys – subprime mortgages and complicated structured financial instruments. Paulson wasn’t charged.

The question is what this case might ultimately mean for both Goldman and Paulson.

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Buy gold, says the  manager of a small Sydney-based hedge fund whose reports are a quarterly treat to read. Last week’s disclosure that China holds more gold than it previously let on has whetted his appetite. I think he has misunderstood what actually happened. More on that below.  Continue reading…