Skip: Hello everyone, this is Skip Montreux reporting from Tokyo.
Dez: Yes, welcome back everyone. This is Dez Morgan reporting from Newcastle in the UK’s northeast.
Skip: And you are listening to another episode of Down to Business English.
Skip: Dez, you really are playing some north – south ping pong over there in England.
Dez: I know, from Leeds to Southampton and now back to the north in Newcastle. I was going to point out that Newcastle is the home to a really famous football team and then ask if you had heard of them, but knowing you Skip I’m afraid I would be wasting my time.
Skip: Oh Dez, give me a break, of course I’ve heard of them. The Newcastle…..Rovers.
Skip: I mean United….okay, it was a good guess I suppose.
Dez: Not even close, but perhaps you have heard of Newcastle’s main sponsor who famously went bankrupt in 2008.
Skip: Oh, yes, I think I do know this. It was…. AIG?
Dez: Not bad…but wrong again. AIG are actually the sponsor of Manchester United but you were close though.
Skip: So who was Newcastle’s sponsor?
Dez: Newcastle’s sponsor was and still is the financial institution Northern Rock.
Skip: Ahh yes, Northern Rock. So what exactly happened to them?
Dez: Well they were, like so many other banks, bailed out in 2008 and are now partially owned by the government.
Skip: The last couple of years have certainly not been very good for anyone who is invested in the major banks. You would think investing in banking shares would be a lot safer.
Dez: Interesting that you should make that observation as I was reading a piece on the BBC webiste a few days ago by Robert Peston, who is the BBC’s business guru.
Skip: Robert Peston, yes I am sure that at least a few of our listeners have heard of him. What was his view?
Dez: Well according to Peston, investing in Hedge Funds is in some ways safer than investing in banks.
Skip: I am sorry did I miss something? You said safer? How could that be?
Dez: I had the same reaction. I had to go back and read that bit again to be sure that I had read it properly.
Skip: You have me intrigued now. Please explain to me and our listeners; in what way is investing in a hedge fund less risky than investing in a bank? I mean, banks are considered a traditional investment whereas the image of hedge funds is that they are the domain of high risk investors.
Dez: The issue is all about how much money a bank or fund is required to have on deposit compared to how much it borrows.
Skip: And how much is that requirement?
Dez: It is usually expressed as a multiple of the deposit, and in banking terms is called leverage. As an example; a bank that was using 3 to 1 leverage would be able to borrow three times the amount of what it held in its reserves.
Skip: So is that example typical of a bank then, to use 3 to 1 leverage?
Dez: Not even close. The average for banks is 30 to 1.
Skip: 30 to 1? So if I’m following you, a bank can borrow 30 times more than it actually has on hand
Dez: That’s exactly what I’m saying. Now, let’s compare that ratio to a hedge fund.
Skip: Yes, what ratio does a hedge fund use?
Dez: Believe it or not, hedge funds employ rates of leverage between 0 and 8 to 1, which as you can see is considerably lower than the average for banks.
Skip: That is significantly lower. If that is the case, why is it that are banks considered a relatively safe investment compared to hedge funds?
Dez: If you think about it a bit I bet you could answer that yourself.
Skip: You know Dez, I appreciate the faith you have in me, but honestly speaking, the whole investment sector of hedge funds is a bit of a mystery to me.
Dez: Like so many other things. Well that brings us to our story for today. Let’s get D2B, down to business with Hedge Funds: What are they? How do they make money? Why are they safer than investing in banks, and are they suitable for you and me?
Dez: So Skip, I think you need to have a bit more confidence in yourself. I want you to take another crack at answering your own question. Why do you think banks are considered a safer investment than hedge funds when in some respects, they’re not.
Skip: Well, would I be correct in assuming that it’s because governments, or in other words tax payers, commonly bailout the banks if they implode through too much debt?
Dez: Very good Skip. It is also for this reason that banks are able to borrow money at fairly low interest rates. Which of course gives the banks a huge advantage over the hedge funds, but even with their lower rates of leverage and relatively higher rates of interest, some hedge funds manage to make very decent profits for their investors.
Skip: Wow, I’m 2 for 2.
Dez: Here is another question for you Skip. What is the difference between a hedge fund and a mutual fund or as we call it in the UK; a unit trust?
Skip: I suppose it might be because there is less government regulation in the hedge fund world.
Dez: Okay, that is certainly true, but I was thinking more of the type of investments that each fund makes.
Skip: Let’s see, a hedge fund can make a wider range of investments?
Dez: That is the key issue here and what that means in practice is that a hedge fund can go long and short in different markets.
Skip: I have heard you mention this before. Going long is when you think the market will go up and shorting is a bet that the market will go down and the investors profit if that happens.
Dez: That is right, and more traditional funds are only permitted to go long, that is invest in the market going up. So Skip are you ready for another question?
Skip: I sure am.
Dez: Great. Now in a bull market where the prices of stocks are rising, who makes more money; a mutual fund or a hedge fund?
Skip: Mutual funds only invest in traditional investments which rise along with the market for them to make money. If the market is rising, then all of their investment dollars will be making money. So the answer is in a rising market mutual funds will make more money.
Dez: Well done. How about in a stagnant or falling market?
Skip: As hedge funds are allowed to invest in products that fall as well as rise they will make some money in a falling market.
Dez: Well done again and that is exactly what the verb to hedge means, it means to provide some safety to the investment by investing just a little in the opposite outcome.
Skip: These small investments in the opposite happening lose money in a rising market and so that is why hedge funds under perform in a bull market?
Dez: Right again. You really are getting the hang of this. There is one other major difference between mutual funds and hedge funds and it is connected with how the fund managers get paid.
Skip: Hedge fund managers get paid more?
Dez: Not always. The difference is that hedge fund managers get a percentage of the profits and in most cases if the fund doesn’t make money, they don’t get paid.
Skip: And that’s not the same for mutual funds?
Dez: Not really no. Most mutual fund managers get paid whether the fund turns a profit or not and generally measure themselves against the general market.
Skip: So if the market as a whole is down 20% and a manager’s fund is only down 15%, the manager is generally quite pleased.
Dez: Exactly, even though the investors still lost money.
Skip: So would I be right in assuming that since the hedge fund manager doesn’t get paid unless the fund makes a profit it is better for the investor because the interests of the investor and the manager are in line with each other.
Dez: That is one interpretation, another way to look at it is because the manager’s salary comes from the profits there is a greater temptation for that manager to take on higher risks to make greater returns.
Skip: So in this way hedge funds are more risky.
Dez: Not all of them. There some very conservative funds that are extremely safe just like there are some very high risk – high return funds. So if you do your homework very carefully there is probably a hedge fund out there that would match your risk tolerance.
Skip: So maybe I should invest in a hedge fund then.
Dez: Many of them are closed to small investors and because they are less regulated than banks there is not so much information on them. So if you do invest in a fund it is a good idea to take a lot of care.
Skip: Maybe I should invest in a couple to get some diversification in my portfolio.
Dez: There are actually funds made up of hedge funds to provide exactly that type of diversification and these perhaps make more sense for you Skip.
Skip: Well thanks for all of that information Dez. I certainly feel that I now know a little more about what exactly a hedge fund is. And now it is time for us to get D2V Down to Vocabulary.
Dez: Allow me to start things off today.
Skip: By all means. What word do you have.
Dez: In the story, we mention Robert Peston, BBC’s business guru. The word guru is applied to someone who is considered to have a great deal of knowledge in a certain area and when they speak on that topic, everyone listens.
Skip: You know Dez, when it comes to investing, I often refer to you as my guru. I rarely make a financial decision without listening to what you have to say on the matter.
Dez: Those are kind words Skip, but some examples of real financial gurus are Warren Buffet and George Soros. Can you give us some examples of non-financial gurus?
Skip: Steve Jobs is often referred to as a tech guru, Seth Godin is a well known marketing guru, and former U.S. President Bill Clinton is considered a political guru in many circles.
Dez: Now to be a guru doesn’t mean you have to be famous. You can be a local guru, well known for something in your community or company.
Skip: Very good point. In my office, our IT guru is a young kid named Ryunosuke. He’s only 20 years old but knows 20 times more than I do about computers, the internet, and all things tech.
Dez: You must be quite envious.
Skip: That I am.
Dez: Do you have our next word?
Skip: Next up is the word intrigued. This is another way to say that you are very interested or curious about something. Usually it is used in the passive voice as in I am intrigued by the ongoing story of the trapped Chilean miners.
Dez: That is a very interesting story to be following at the moment, isn’t it. I hear that engineers are hopeful that they may reach them earlier than they thought.
Skip: That is the latest yes. Let’s keep our fingers crossed. Can you give us another example of intrigued?
Dez: It is very intriguing how U.S. banks and Wall Street on the whole received such a large bailout from the government to avoid financial collapse, yet at the same time, they didn’t for a minute cut back on the size of bonuses they handed out to their top earners.
Skip: Yes that certainly raised the publics curiosity to say the least. What’s our next word?
Dez: Next, I’d like to deal with leverage. Which in the story is used to compare the ratio of how much money a bank has borrowed compared to its equity in other words the amount of money it actually has.
Dez: What I would like to point out is that this word can also be used idiomatically in a wide variety of situations. As an idiom, to leverage means to have the ability to influence someone based on your position.
Skip: Maybe we should give some examples of that in action.
Dez: Of course. When Barack Obama was first elected President, he was immensely popular and he had a great deal of political capital. He leveraged a lot of his popularity and political capital getting health care reform passed.
Skip: Unfortunately for him, many Americans feel that he has not done enough for the economy, and he doesn’t have much else to leverage. It is not looking very good for his party in the midterm elections that are coming up in November.
Dez: At least for the moment it’s not.
Skip: Moving on, let’s break down the idiom to have on hand. To have something on hand means that it is in your possession and you are able to use it at a moments notice. In the story, we talk about a bank having money on hand-that is money in their vaults.
Dez: Another example, it’s a good idea to have a fire extinguisher on hand in your home or office as you never know when you will need to put out a fire.
Skip: I always have an extra USB thumb drive on hand in my briefcase. Sometimes when I am at a client’s office, I suddenly need to print something out from my laptop. It’s a lot more convenient to transfer a file from my laptop to a thumb drive and then pop that into my client’s desktop, than it is to try to connect my laptop to their LAN network.
Dez: Nice idea, did you learn that from your tech guru at work?
Skip: Yes, as a matter of fact, that is one of his little tips.
Dez: I might start doing that myself. Next is the verb to implode. This is the opposite of the word explode. Whereas explode means that something bursts outwards, implode means that it collapses inward.
Skip: It’s interesting that even though they are opposite words, both an implosion and an explosion end in the destruction of something.
Dez: Yes, that is an interesting point. Here is an example: the American car industry came close to imploding last year because consumers were not interested in buying their vehicles. General Motors would have certainly collapsed under the weight of its debt debt if it wasn’t for a government bailout.
Skip: Good. Okay, next is the noun regulation and its verb form to regulate. To regulate something means to control its movement or distribution.
Dez: If any of our listeners have ever done any SCUBA diving, I’m sure they are familiar with the piece of equipment called the regulator. That is the mouthpiece you use that controls the flow of air from the tank into your lungs.
Skip: The noun, regulation is another word for rule or law. It’s often used in the word pair government regulation, which is a rule or law designed to keep controls on something.
Dez: In the story we refer to the government regulations surrounding investing. There are different regulations for Hedge Funds and Mutual Funds.
Skip: The Japanese government will be introducing new regulations next April for foreigners living and working in the country. They allow people to apply for 5 year working visas and eliminate the need for re-entry permits. It’s going to make traveling in and out of the country much easier.
Dez: That does sound good. When I lived there the standard work visa was only 3 years and the renewal process always seemed to be such a headache. Another interesting word from today’s report is stagnant.
Skip: A great adjective to describe my love life at the moment.
Dez: I’m sorry to hear that.
Skip: Not as sorry as I am to report it. You’d better explain what it means.
Dez: When something is stagnant it is in a state of suspension or is completely lacking movement.
Skip: Yep, that sounds appropriate.
Dez: Well other than your love life, this word is very useful in business to describe a market that is not growing? When sales of a company’s product stagnates it would be a good idea to introduce a new model or an entirely new product line.
Skip: Or look for another market to enter.
Dez: That would be another option yes. In fact, if you look at the tobacco companies, as their sales stagnate in North America and Europe, they are focusing more attention on markets in developing countries where there are fewer government regulations.
Skip: Maybe that’s what I should do, look for a new market.
Dez: Skip, I’m your financial guru, not your personal life guru. Following on…
Skip: Yes, following on I want to briefly touch on to hedge. Dez clearly defined what hedge means in the story but I would like to point out to everyone that the expression to hedge your bets is very common expression. It means the same as to play it safe. Dez, are have you ever hedged your bets?
Dez: Yes I have, of course. When I left Japan, I was pretty sure that I was heading back to the U.K. permanently but just to hedge my bets, I left my job on very good terms with my employer. That way if things hadn’t worked out for me here, I could always have returned to Japan for work.
Skip: Perfect example. Here’s another one. I don’t know what it is like over there in the E.U. but in North America, most large corporations hedge their bets and donate money to all the leading political parties. That way, no matter which party forms the government, corporations have at least a little leverage.
Dez: Yes, it’s much the same in England and the rest of the E.U. I imagine that there is a lot of bet hedging going on now in the U.S. with those November mid-term elections approaching.
Skip: It’s almost too much to tolerate.
Dez: Hey, that’s my next word, tolerate and its noun tolerance. Tolerance is the ability to withstand the negative effects caused by things around you. For example do you remember when we were talking about investing in gold a few weeks ago?
Skip: Yes I remember that.
Dez: Well the price of gold tends to be very volatile, bouncing around a lot and this is just something investors in precious metals just have to tolerate.
Skip: Tolerate is also often used in negative expressions. An example that comes to mind is the recording industry which has very little tolerance for people who illegally download music.
Dez: Or retail companies that have zero tolerance for shoplifters. If someone is caught stealing merchandise, even if they have no previous record, they are handed directly over to the police.
Skip: Very true. Our final word today is the very common business term diversification. It is the process of becoming more varied. In the story I comment that I should increase my stock portfolio diversification. What I mean is that I should try to use a wider variety of methods when investing or at least invest in a greater range of different stocks.
Dez: That is a sound investment strategy- diversify. I diversify by investing in a combination of stocks, bonds and precious metals. That way, if any of these sectors takes a hit, hopefully one or both of the others will increase at the same time. However in our globally connected economic world today, it is often harder to achieve diversification.
Skip: And that is all the time we have for vocabulary today. All 10 of these words and phrases are very useful in both a business context as well as everyday English conversation. I hope all of you go back and listen to them in the context of the story again.
Skip: Just before we wrap things up today Dez I want to once again remind everyone about our Tell 2 Friends contest.
Skip: The deadline to enter for your chance at winning an 8GB iPod Touch is quickly coming up. The last day to enter is September 30 and we will be making the draw the very next Day on October 1st.
Dez: Entering is very simple. Just tell 2 of your friends or colleagues about Down to Business English. That’s it.
Skip: And probably the easiest way to do that is by mentioning us on your Facebook wall or sending out a Tweet about us on Twitter.
Dez: After you have done that all you have to do is let us know, either by direct messaging us on Twitter or sending us an email at email@example.com.
Skip: And speaking of Twitter Dez, I know that I am seriously lacking followers but you, sir are in great need of tweeting something for people to follow.
Dez: I know, I am still not as active as I should be.
Skip: Everyone, we would love it if you were to follow us. You can find me at twitter.com/skipmontreux
Dez: And I am at twitter/dezmorgan .
Skip: Okay. Finally, don’t forget that the free audio script for today’s episode, as well as the audio scripts for all our past episodes are available at www.downtobusinessenglish.com
Dez: Yes, please do take advantage of that resource.
Skip: Thanks for listening everyone. See you next time.
Dez: Yes, thanks everyone. Bye.