82,891
edits
Hedge Position Adjustments - Equity Derivatives Provision: Difference between revisions
Hedge Position Adjustments - Equity Derivatives Provision (view source)
Revision as of 18:11, 11 January 2022
, 11 January 2022no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 13: | Line 13: | ||
It is certainly true that investors come and go, and it is hard for an investment manager to explain to a new investor in 2021 that her returns will be deprecated by some tax liabilities just incurred from a position closed in 2006, but why should this become the dealer’s problem? In practice dealers tend to be a bit phlegmatic: the real-world likelihood of retrospective taxes actually being imposed or enforced must surely decrease over time, so dealers will set arbitrary “sunset periods” of two, three or five years, and figure they will just wear any tail risk beyond that. | It is certainly true that investors come and go, and it is hard for an investment manager to explain to a new investor in 2021 that her returns will be deprecated by some tax liabilities just incurred from a position closed in 2006, but why should this become the dealer’s problem? In practice dealers tend to be a bit phlegmatic: the real-world likelihood of retrospective taxes actually being imposed or enforced must surely decrease over time, so dealers will set arbitrary “sunset periods” of two, three or five years, and figure they will just wear any tail risk beyond that. | ||
“''I didn’t choose your hedge counterparties, so why should it be my problem if they blow up?''” Fair enough — but also, you ''did'' choose not to pick your own counterparties, but rather to leave it to your dealer, and who is to say you wouldn’t have chosen the same | “''I didn’t choose your hedge counterparties, so why should it be my problem if they blow up?''” Fair enough — but also, you ''did'' choose not to pick your own counterparties, but rather to leave it to your dealer, and who is to say you wouldn’t have chosen the same one — or even one who blew up ''worse''? Just because you are getting exposure through a dealer’s swap facility shouldn’t absolve you from all hedge counterparty risk: that is a real cost of investing in a market. Given that hedge counterparties are usually cash brokers on DVP executions (or fully collateralised stock loans) there is very little pure risk being run here: this one is far enough down the tail that people tend not to die in a ditch about it on either side of the argument. | ||