Tags: risk | carry | trades | normal

In ‘New Normal,’ Even Riskless Trades Can Lose

By Michael Carr   |   Wednesday, 24 Oct 2012 07:36 AM

All investments carry some degree of risk; however, there are times when hedge funds and the financial media write about the benefits of riskless trades. Riskless investments usually include Treasury bills, which are free from default, although inflation has been higher than the interest rates on short-term Treasurys almost continuously since 1998.

If inflation exceeds the interest rate, Treasury bills are actually losing buying power, and that is not truly riskless. Even though investors receive interest and principal payments, the dollars they get back buy fewer goods and services than the dollars they invested.

Hedge funds have also been pursuing risk-free returns using what they call the “carry trade.” Investment managers might buy Brazilian government bills that offer interest rates of 6 percent or more and fund the investment with funds borrowed against U.S. dollar holdings at very low interest rates.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

For several years, these trades were profitable. Since 2008, this trade has delivered gains of more than 80 percent to hedge funds. But in 2012, the carry trade has been losing money, and Bloomberg reports that this risk-free strategy has led to losses averaging about 2.8 percent recently. Experts blame the easy money policies of the Federal Reserve and other major central banks for the losses.

These policies are also partly to blame for rising inflation, according to independent analysts, and many economists are worried about what the unexpected consequences of further global easing will be.

Without intending to, the Fed has eliminated risk-free trades. In time, we will learn about other negative consequences that result from the “New Normal,” where high unemployment and persistent inflation are likely to change the dynamics of the investing environment.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

© 2017 Newsmax Finance. All rights reserved.

1Like our page
2Share
MichaelCarr
All investments carry some degree of risk; however, there are times when hedge funds and the financial media write about the benefits of riskless trades.
risk,carry,trades,normal
297
2012-36-24
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved