Hedge Fund
Hedge funds are a special category of fund managers. They now have a more appropriate name “absolute return funds”. Probably investors who have enough understanding of foreign exchange knowledge have also heard of it. Such high-end funds usually care more about managing the total risk of investment funds than pursuing relative performance, which is still the mainstream among traditional fund management institutions. Hedge funds are more aggressive in their approach to investing, so some will resort to financing to realize their leverage potential and take advantage of the derivatives market (although leverage has been reduced since the LTCM bankruptcy in 1998, and especially since the 2008 financial crisis) . They are small (albeit high-profile) compared to traditional funds, but have been growing exponentially, with the Reserve Bank of Australia stating in its monetary policy statement in August 2011 that hedge funds managed $2 trillion Dollar.
Thanks to hedge funds. Alternative investment; The characteristics of its branches are more diverse, many have unique purposes, styles and methods. Hedge funds in the foreign exchange market include pure money funds (which speculate on currency fluctuations) and the following:
1. Foreign exchange cash fund
2. Foreign Exchange futures trading Fund
3. Macro funds, which bet on economic or regional performance in the foreign exchange market
4. Carry trade funds, which are financed and reinvested in low-interest countries
5. Arbitrage funds
Even hedge funds that do not have direct exposure to foreign exchange markets tend to have an impact if their activities are cross-border. For example, they raise money in one country’s market and invest in another, thereby earning a consistent return on foreign exchange transactions.
Currency arbitrage
Arbitrage is something you’ll hear mentioned a lot in the foreign exchange world. For small retail traders, however, arbitrage is a lot of talk and a lot of action. Arbitrage is primarily for large players, and it can be extremely fast and profitable. Let’s look at an example.
Suppose you are a dealer in the money market offering quotations for USD/JPY. The current rate is 85.00/10. This means that you would buy dollars at 85.00 and be willing to sell dollars (buy yen) at 85.10. You notice that one of your competitors is quoted at 85.03/13; In other words, they are willing to bid at 85.03 and sell at 85.13.
Now, let’s further suppose you’re worried that the dollar might fall. To avoid people selling to you (you have to buy at 85.00), you lower your offer, say to 84.85/95. Let’s see what happens.
At this time ' The third party bank noticed that you were quoting (based on fears of a falling dollar), while the other bank with no such concerns was quoted at 85.03/13. The third party bank will buy it on its own initiative at breakneck speed (84.95 from you) and then simultaneously sell it to another bank that is still quoting 85.03.
So the third party (we now call it “ Arbitrageurs ”) I’ve already made a risk-free profit from you and your competitor.
