Hedge Fund News From HedgeCo.Net

You Can’t Just Call Loans Options

November 15, 2019 : Permanent Link

(Bloomberg) A pretty ordinary way for a hedge fund to invest is that it borrows money from a bank and uses that money, along with the fund’s own equity, to buy stuff. If the stuff goes up the hedge fund pays back the bank’s loan and keeps the profits. If the stuff loses value the hedge fund takes the loss, reducing its equity. If the stuff loses a lot of value then the equity will reach zero, the loan won’t get paid back, and the bank will eat the rest of the loss. If the fund puts up $20 and borrows $80 from the bank, it can buy $100 worth of stuff.

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