What is Credit Rating and Why Smaller Funds Outperform?

Seminar Report
Institution
Course
Date
Speakers: Dr. Stan Ho,
Hong Kong
SEMINAR REPORT
PART ONE: SUMMARY AND TOPICS
1 Credit Rating
According to Dr. Stan (2019), credit rating is the outlook on the credit-worthiness of a corporation or a transaction. However, these ratings can only address the credit risk. Credit ratings do not address other types of risks. Consequently, these ratings do not give any comments on the liquidity of any financial instrument in a corporation. Credit ratings also seek to ascertain the likelihood and the willingness of a borrower to pay back the loan within the stipulated time without defaulting. A high credit rating indicates that a borrower can pay the loan without any issues. On the other hand, a poor credit rating indicates that a bank or a borrower will experience difficulties in paying back the loan. Sometimes credit ratings limits the chances a corporation has in receiving a loan on favorable conditions. Since credit rating agencies use both qualitative and quantitative methods of assessment, different ratings can be given based on the assessment method used.
2 Data as a commodity and Risk Management
Data is any information or facts that are collected to assist in decision making. Data is a commodity because businesses can use data in decision making. Today, data has become valuable compared to any other resource. Data is a valuable marketing tool. Further data is a very important commodity in financial services. Organizations should come up with rules regulations to protect data in businesses. For example, businesses should report data breaches if these breaches might interfere with the privacy of the customers. When managing big data risk, a corporation should check the credit history of a company, assess the liquidity risk, and check the payment and the settlement history of an organization.
3 Financial structured product: Good or bad?
Financial structured products are non-principal leveraged and protected. With these products, investors gain increased coupons by selling their products via structured products. The value of financial structured products increases when there are market crises. Banks also do benefit from these products if they purchase the risk premiums at cheaper prices than the brokers in the market. When such transactions are done, a win-win condition is achieved. First banks lose their money from risk hedging and the investors will lose their principal after a drop in the HSCEI index.
4 Why smaller Hedge Funds Outperform?
Smaller hedge funds surpass the performance of bigger hedge funds. This is because large funds have a carrying capacity and involve higher transaction costs. Sometimes innovative people will choose to start small companies instead of working in large companies so that they will be able to maximize their wealth.
5 Bold Insurance Practice
A bond is a form of debt. For example when an investor decides to purchase a bond, it means that one is lending money to the borrower. In return, the borrower can promise to pay the money in a certain period. Examples of bonds include interest options, offering structures among others.
PART TWO: DISCUSSION
1 Why smaller Funds Outperform?
It is indeed true that small hedge funds do outperform large hedge funds. Sometimes investors and other business individuals keep their attention on the large hedge funds instead of small hedge funds. However, as much as these funds are good for investment, they cannot assist investors and other business corporations to achieve high returns as compared to small hedge funds. Large hedge funds with collide small hedge funds in terms of the returns (Ramadorai, 2013). There is a very huge difference between the two categories of funds in terms of risk profiles, performance, and agility. Small hedge funds have a lot of opportunities in emerging markets. Examples of large hedge funds that perform well in the market are activist funds and equity funds. Additionally, investors are likely to leverage higher returns if they invest in small hedge funds.
According to González, (2016), the compensation structure of hedge funds is not effective in aligning the incentives of managers and the interests of the investors. Thus when funds tend to grow larger, managers have low incentives to improve their performance on funds. While large hedge funds are attractive, small hedge funds will give higher returns at the end of the day. Through the knowledge I have gained from the presentation, I can teach investors and business owners on some of the advantages of using smaller hedge funds when investing.
2 Credit Rating
I agree with the speaker that credit rating is a very important tool because it enables borrowers to borrow loans and credit cards from financial institutions. Companies and individuals who have good credit ratings can be able to borrow loans from financial debts markets and financial institutions easily. Some of the benefits of credit ratings include the following.
Good credit ratings reduces the costs of borrowing. Corporations that have good ratings can reduce the costs of borrowing funds. Additionally, a company that has good ratings can increase the audience for borrowing. Investors can also get attracted by the business because they understand the degree of certainty an institution has.
A credit rating acts as a marketing tool. Companies that have good ratings can able to create a better image for the members of the public and the investors. With this, investors are very confident anytime they are investing in the company. Further, a company that has good ratings can be able to reduce costs in public issues like media coverage sand conferences. A good credit rating is a motivation for growth in any corporation. Companies are always confident in their operations such that they can undertake new projects. With a better and improved image that is created by credit rating, companies can be able to mobilize funds from banks and other financial institutions.
Good credit ratings are very important to the brokers and other intermediaries in the market. When a company has a good credit rating, then brokers do not waste a lot of time reviewing the profile of the company. They will spend less time in viewing and analyzing the credit position of a company. Thus they can save time, reduce costs. Credit rating makes unknown users to recognize a company immediately they enter the market.
Although credit rating is very important, it has some limitati...