The hardest thing to judge is what level of risk is safe.
By creating the European Central Bank, the member states exposed their own government bonds to the risk of default. Developed countries that issue bonds in their own currency never default, because they can always print money. Their currency may depreciate, but the risk of default is absent.
When you sell options, you get paid for assuming risk. That can be a profitable business, but it does not mix well with the risks inherent in a leveraged portfolio.
Outperforming the market with low volatility on a consistent basis is an impossibility. I outperformed the market for 30-odd years, but not with low volatility.
The securitisation of mortgages added a new dimension of systemic risk. Financial engineers claimed they were reducing risks through geographic diversification: in fact they were increasing them by creating an agency problem. The agents were more interested in maximising fee income than in protecting the interests of bondholders. That is the verity that was ignored by regulators and market participants alike.
Hedge funds are a very efficient way of managing money. But there are clearly some risks. Hedge funds use credit and credit is a source of instability. Transactions involving credit should be regulated.
Follow AzQuotes on Facebook, Twitter and Google+. Every day we present the best quotes! Improve yourself, find your inspiration, share with friends
or simply: