LINC Magazine spring 2012

LINC

MAGAZINE First issue Second issue 2011 2012

Nobel Prize in

Economics Fantasy Premier League Sports: investing in the future

Hedging - what it is and what it is not Short selling Portfolio Diversification Interview with Saxo Bankâ&#x20AC;&#x2122;s Thomas Berggren LINC, The The Finance Society LINC, Finance SocietyatatLund Lund University University

World Class Trading Anytime, Anywhere

Introducing

SaxoTrader For iPhone® and Android

• Market analysis • Real-time data & charting • Trade from your mobile

The firsT fX Trade aT Terminal velociTy We built our new saxo Bank app with the control, precision and reliability you need to execute your trading strategy anytime, anywhere. experience the power of saxo Bank in the palm of your hand and watch as we take mobile trading to the extreme at saxobank.com Find out more at saxobank.com

The editorial

Andreas Schou Kongstad, Editor in chief Aleksandra Sarmes, Editor Mimmie Andersson, Marketing Jakob Normark, Journalist and sub editor John Sander, Sponsorship Alexander Gjörup, Journalist Johan Rahmqvist, Journalist Simon Andersson, Journalist DIlan Hewa, Journalist Oscar Frithiof, Journalist

Linc Magazine - May 2012 – 3 –

Linc Magazine — May 2012 The leader article p. 5 Portfolio Diversification p. 6 How to dress in the finance world p. 7 Fantasy Premier League p. 10 Short selling p. 13 Nobel Prize in Economics p. 15 Interview with Thomas Berggren, Saxo bank p. 18 Sports: investing in the future p. 22 The Hedge p. 24

– 4 – May 2012 - Linc Magazine

The leader article — May 2012 A year has gone by since I first started to work with the magazine. It has been a very interesting journey, in a very intense macroeconomic environment. I had hoped that my approach in this edition would have been less dire. However, considering the current, somewhat chaotic situation in the Eurozone, this is not the case. Trying to find some positive events (at least from the investors’ perspective), the S&P500 recorded a 12 percent gain in the first quarter – its best annual start in more than a decade. Also, when comparing the possible returns on stocks and junk bonds with normal bond yields, the first two still seem like a more attractive pick. We have also seen a successful triggering of the Sovereign Credit Default Swap (CDS) in Greece, resulting in a moment with an increased risk appetite in the Eurozone. This partly occurring since investors now had a confirmation that the use of the CDS was a functional way to hedge their investments towards sovereign debt. While corporate defaults leading to payment of CDS insurance are routine, this was the first time it was used in a sovereign credit event. Even though Greece still has a long way to go, the most imminent risk is now another PIIGS-country. More specifically, Spain. The vast unemployment rate among their young people and a burst house pricing bubble worries the investors. Also, the bond yield of the 10year government bond is close to what is considered a threshold before borrowing costs become unsustainable.

We also look at some of the “new” ways to invest, here focusing on investing in sports on page 22. For those aiming on getting the Nobel Prize (I think we might need some of those at Lund University), we will give you some insight into the Nobel Prize in Economics on page 15. Keeping the tradition from my last leader, I would like to end this one with a quote. This time from Ralph Waldo Emerson, and not from the American teenage movie Van Wilder: “Do not go where the path may lead, go instead where there is no path and leave a trail”.

Andreas Schou Kongstad, Editor in Chief

Considering the current market turmoil, one might ask how the future of the finance industry looks like today. The interview on page 18 will hopefully give you some valuable insights into the world of finance. Linc Magazine - May 2012 – 5 –

Portfolio Diversification

Portfolio Diversification The concept of diversification is best exemplified by the proverb ‘don’t put all your eggs in one basket. Creating a portfolio consisting of only one stock may indeed carry a significant amount of risk. For instance, when Enron collapsed a few years back thousands of employees not only lost their jobs but also their life savings which were all tied to Enron stock. On the other hand, if one opts to fashion a portfolio with a variety of stocks the potential financial loss can instead be minimized. Thus, diversification essentially serves to reduce financial risk by investing in different assets. There are other forms of financial risk management such as hedging but following will be an exploration of portfolio diversification.

can earn a steady long run average rate of return by diversifying a portfolio.

serves to reduce the unsystematic risk i.e. industry specific risk by holding assets with low correlation.

Diversification can be achieved by “Don’t put all your eggs in one basket” constructing a portfolio with one asset class such as stocks, or incorporating several asset classes such as stocks and bonds. The benefit of combining asset classes is that in certain scenarios, when stock returns fall the performance from bonds, can bring up a portfolio’s return and make up for the losses An example of a well diversiincurred by the stock. Alternativefied portfolio: ly, one can produce an all-stock • A range of technology and enportfolio consisting of different ergy stocks that offer high extypes of stock. pected return • A large cap mutual fund This form of portfolio diversifica• Treasury bonds yielding a low tion also relies on the stocks reactreturn with low risk ing differently in a given market • Choosing stocks that balance cysituation. For example, in a volaclical and non-cyclical industries Portfolio diversification is oftentile market a certain type of stock - Cyclical stocks could be from times dependent on an individual’s may show high returns while anthe retail and automotive indusrisk aversion. How well a portfolio other range of stocks will decrease tries is diversified will be influenced by and the reverse may occur in a - Non-cyclical could be health the willingness in committing to less volatile market environment. care and utilities that typically can an expected return given a certain Put differently, the makeup of the withstand weak economies risk. Assuming a simplified sceasset classes and its subtypes are nario, a risk-averse investor would governed by its correlation with The bottom line when crafting a prefer a low yielding portfolio with each other. As explained before, balanced portfolio is to consider low risk opposed to a high yieldassuming all else remains the the risk versus the reward. Are you ing portfolio with high risk. From same, when one asset falls, the a risk lover or do you want to play a short run perspective, an invesother will increase evening out the it safe and diversify your risk? tor might face losing big growth expected return. In portfolio theoopportunities. But in theory, one ry, this form of risk management Written by: Dilan Hewa, Johan Rahmqvist – 6 – May 2012 - Linc Magazine

How to dress in the finance world

How to dress in the finance world Based on the Swedish business and financial sector

e all know that it’s our skills that help us climb and make a career. But as soon as we enter the working world, we are being judged by our appearances. The question is: what is the right outfit when entering the finance world? How far can we stretch to show our own style? Should we all look the same? These are all questions that I believe many students are asking themselves when preparing for a job interview, first day at work or first day as an intern. Maybe we should begin with assessing what mistakes we could do when selecting an outfit for the first meeting with what might be our future manager. As my aid, I have been examining recommendations from different websites for jobseekers.

“You never know if the fragrance you use is the same the interviewer’s evil ex used” Starting with men, even though you might think you look a bit courageous in that strong colored tie or want to show your kind and humorous feature with a funny patterned tie, many think it is more appropriate to leave them at home. Even though they might represent you as a person, you don’t want to make an impression of nonchalance or goofiness in a professional environment. Furthermore, entirely forbidden are different kinds of headgears. There’s no explanation for wearing for example a cap at an interview, but this I hope you already know. Regarding having a beard, you should consider having

it clean shaved. If you insist on keeping it, it has to be well trimmed. The is lumberjack style probably not that suitable in the finance world. Moving on to women, what are the big dress code mistakes women could make? First of all, even though you may be flirtatious, it should not be that particular personality trait your interviewer remembers when ending the interview. Showing a cleavage or wearing a short skirt is therefore not a good idea if you want to be taken seriously. Even though you should have a decent outfit, it also has to be appropriate. In that way, you will show that you rely on your skills and not on a nice figure. It is also very important to think about the makeup and the same rules apply here. If you have too much makeup on and wear a lot of heavy perfume, it will give the same impression of being unserious as if wearing a cleavage. It’s usually a good idea to not use any perfume at all, only putting on deodorant. You never know if the fragrance you use is the same the interviewers’ evil ex used, making the interviewer relate to this while talking to you. This applies both for men and women.

ow, what can we gather from all of this? Well, suppose you choose to wear a suit with a shirt and a tie or scarf (for women) in soft colors and try to avoid the mistakes mentioned above, your appearance should give a good first im Linc Magazine - May 2012 – 7 –

How to dress in the finance world

pression. Simply use your common sense and ask yourself, what does this clothing convey about me? Does it make me look serious or a bit casual? Many think that you should strive for professionalism, especially if you’re searching for jobs/internships in other countries than Sweden. There’s a more strict way of dressing in the finance and business world abroad than in Sweden, though rumors suggest that even in Sweden employers are starting to demand a stricter dress code.

ut let’s continue to what I believe is really interesting about this subject, namely how much can we blend our own style in our business outfits? Do we all have to look the same, or are we allowed to set a personal touch when dressing for work? What factors do we have to consider? To be able to draw some conclusions about these questions, I felt it wasn’t enough to read some books or check out websites. I had to have an expert’s opinions - someone who is familiar with the business and finance industry. To my help I’ve had the pleasure to ask some questions to Lone Fønss Schrøder who is currently a Chairman at Volvo Car Corporation. During her working career she has also, among others, been President for Walleniusrederierna AB, SVP at Maersk for 21 years and Senior Vice President for A.P. Moller Maersk Group. Regarding her experience and her good taste in clothes, I found it beneficial to ask for her help to sort out my questions.

treme from what you normally wear. As said before, the dress code in the finance industry is very strict, but you also have to be careful not to be too overdressed, making your co-workers feel uncomfortable. If you have tattoos or piercings, you should try to hide them. Even though they might be part of your personality and you’re proud of them, they’re not so appropriate in the finance ambience.

“Shouldn’t women be able to be strong women and at the same time dress like a woman?” I then asked her what she thought about men’s outfits and their boundaries. According to Lone, men quite easily find their own style in “the world of suits”, without looking as “too much”. Generally, it’s better to choose a stricter outfit than to be “too much”. Personally, I believe men working in the business and finance industry should be pleased about its dress code, since what fits a man better than a suit?

“Be ready to be judged” When talking to Lone, she confirmed that the first encounter is crucial, or more precisely, the first 30 seconds. In other words, be ready to be judged by your appearance. When you choose your outfit you should try to view yourself as a representative for the company, because in the end it’s them you will represent. It’s also important not to take it to an ex-

– 8 – May 2012 - Linc Magazine

n this industry, women still have to try more to be accepted. This often leads to women being cautious about how they are interpreted, which in turn makes them to take on an identity as a “third gender”. But shouldn’t women be able to be strong women and at the same time dress like a woman? We should, but what’s essential is to be well dressed. You can have a more feminine outfit but you shouldn’t go against the dress code or your company’s values. If you are too stubborn to hold on to your style, you could give the impression of being inflexible, not only in terms of the way you dress. When choosing what to wear, you should ask yourself some questions: What does this clothing say about me when I’m wearing it? Is it provocative? In that case, am I trying to provoke the company or do

How to dress in the finance world

I want to fit in? As an example, for an investment banker it isn’t enough to try to be a trendsetter by how you dress, it’s your actions that make you a trendsetter. When you’re applying for a job or are a newbie, a rule of thumb should be to try to get to know the company. If it’s far away from your taste, then maybe you don’t fit in. As Lone said, this could be the first test to see if the business really is something for you.

ashion changes all the time and it is a fine balance between mixing your personal style with your company’s dress code and values. In some companies there are less strict rules concerning employees’ clothing. In those firms, it could be acceptable to have stubble, though in other firms you could get a comment like: “you have a shadow on your face”.

ow, what has it come down to? How individual can we be regarding our clothing at work or internship? Together with the general information about how to dress or not to dress in the finance world and Lone’s thoughts, I can now come to some conclusions. We do not have to look the same. Yet, we can’t go our own stubborn way and not respecting the company we work for. By knowing the company’s rules and values, you should try to adjust to these and then gradually find a balance between your own style and the dress code that’s given. I believe that, in Sweden at least, there is room for us to give our outfits an edge or twist, given that we respect the employer and its customers.

Written by: Aleksandra Sarmes

Vill du vara med och annonsera i nästa nummer av

Linc Magazine? Maila till oss på magazine@linclund.com

Linc Magazine - May 2012 – 9 –

Fantasy Premier League

the risks and rewards of consistent and inconsistent football players Assessing the risk against reward is a legitimate concern for any individual involved in the stock market. However, this principle may also be applied to the popular online game Fantasy Premier League. Every online user aims to maximize their total returns during the season given the costs associated with each football player. Yet, the uncertainty of a player’s point return each week can curtail meticulous budget spending. In the current 2011/2012 season of the Barclays Premier League, approx. 2.7 million people eagerly participate every week in the biggest and free Fantasy Football game in the world. The users select a squad consisting of 11 players and 4 subs. The points accumulated every game week are directly derived from the players’ actual performance in the Premier League matches. For instance, if Manchester United player Wayne

Rooney scores 2 goals along with a Chelsea defender managing a clean sheet, these points are counted towards the total score in a week. Naturally, one would immediately assume that the easy solution is selecting the best players from the top teams to complete one’s all-star team. Unfortunately, among other limitations in the game one is restricted by a budget of £100 million with each player having a price reflecting their past and current performance from each football season. For instance, Arsenal forward Robin Van Persie carries a hefty price tag of £13.6 million considering he has scored over 20 goals this season with a similar output in past seasons. On the other hand, to attain the services of confident Danish Nicklas Bendtner from Sunderland would cost a mere £6.1 million. Following below is a comparison of the two players’ recent form:

Ganmeweek 27 Gameweek 28 Gameweek 29 Gameweek 30 Gameweek 31

Average

Robin Van Persie

6,6

Nicklas Bendtner

7,4

– 10 – May 2012 - Linc Magazine

Fantasy Premier League

At first glance the obvious choice between the two players seems to be the Dane. However, compared to the consistent Van Persie, Bendtner’s overall performance during the season has been far more erratic. In fact, at the time of writing Bendtner has scored less than 10 goals this season. Also to be taken into consideration, many would argue that Van Persie is Arsenal’s main source of goal production whereas Sunderland has several other players who could contribute just as well as Bendtner. Thus, the enticing low price provided by the Sunderland forward carries a significant amount of risk. A fantasy football user who is cautious of risk (risk-averse) would therefore balance a team with expensive, consistent players such as Van Persie and low

budget, risky alternatives like Bendtner who has the potential to offer high returns. Granted, several other factors will need to be assessed when selecting players such as the perceived ‘softness’ of upcoming fixtures, real life squad rotation and so forth. Ultimately, one may prefer employing a pragmatic, statistical approach to succeeding or simply go by gut feeling when contemplating the inherent risks and rewards of team selection in Fantasy Premier League.

Written by: Dilan Hewa, Johan Rahmqvist

Linc Magazine - May 2012 – 11 –

World Class Trading Anytime, Anywhere

Introducing

SaxoTrader For iPhone® and Android

• Market analysis • Real-time data & charting • Trade from your mobile

g n i l l e s t r o h S

Short selling

“The virtues of short selling”

his analysis is an extension of the previous issue’s article dealing with short selling. If you are not aware of the fundamental basics of short selling, I recommend you reading the article in the previous edition before continuing. Short selling has been portrayed as something negative for the market. In the wake of the financial crisis of 2008, short sellers have often been blamed as a cause of the crisis. I will try to explain why I believe that short selling is an important part of the financial market.

make money? Well, they should short on the peaks and then cover their position in the trough. Therefore, a good short seller would short at point A and cover at point B. Then he would wait for the price to rise, short the stock at point C and then cover again at point D. However, it is quite unlikely that anyone would be this good at finding the highs and lows, but just suppose this is true.

T I have designed a hypothetical graph of a corporation’s stock. Let’s suppose this is a graph where there are no short sellers in the market. Thus, before point A , people are buying stocks, and before point B people are selling stocks. This is basically how it works when people are taking long positions.

ow we imagine that we are encountered with short sellers in the market. How should short sellers act in the market to actually

he question now is what actually happens to the shares of the company when introducing short sellers in the market that actually knows how to make money (the smart investor). That person would short at point A (shorting is when you borrow a stock and sell it), thereby increasing the sell side and reducing the price. Hence, if many short sellers are acting in the same way, the peak will be lowered. When the short seller needs to cover, he will do this at point B. Here, the buy side will increase due to buyers covering their shorts. Therefore, the minimum will not reach as low as in a market without short sellers. The main aspect of this is: a short seller who makes money on the market will actually lower the volatility Linc Magazine - May 2012 – 13 –

Short selling

of the stock, which is good for everyone. It’s good for management, it’s good for the long holder of shares, and of course it’s good for a short seller because he is making money.

market. Another aspect is that short sellers may provide investors with a long position an opportunity to generate some extra income by lending their shares to the short seller.

There are also short-sellers who may not act quite like this. Instead, they are shorting when the stock is low. This would imply that the stock price would drop even more, since there are more sellers in the market. Assuming the buy side is strong enough, and the price of the stock reaches attractive levels, the price will start to increase, making the “not-so-smart investor” losing money using this strategy. When the stock starts to increase, they become anxious of the prices running away from them, forcing them to cover their shorts. This causes an upturn in volatility and the peaks to increase. These short sellers are punished since they are losing money and within time they will most likely stop using this strategy.

more negative point of view on short selling is how S&D Traders (short and distort) manipulate stock prices in a bear market by taking short positions and then try to slander the company to drive down the price of the stock. This is the complete opposite of the “pump and dump” strategy where someone takes a long position and then attempt to drive up prices by spreading false information and rumors about the company.

nother reason why short selling is good is that it provides more information to the market. Skilled shorters often try to develop a comprehensive analysis and legitimate due diligence of a company to find facts and weaknesses that support their theory that a company is in fact overvalued. If we believe that most shorters are accurate and ethical in their actions, they help creating a healthier stock

– 14 – May 2012 - Linc Magazine

Generally it is easier to manipulate a share to go down in a bear market than up in a bull market. Movies like “Wall Street” (1987) and “The boiler room” (2000) are good movies that illustrate the topic of stock manipulation. Another shining example of S & D strategy is the James Bond film “Casino Royale” (2006) where the villain Le Chiffre’s investment strategy is that he takes a short position in a share and then exposes the company to a terrorist attack that will dramatically lower the price of the stock.

Written by: Alexander Gjörup

Nobel Prize in Economics

Nobel Prize in Economics The Nobel Memorial Prize in Economic Sciences is one of the most prestigious awards in the field of economics. While not originally established by the will of Alfred Nobel, the Prize was established and endowed by Sweden’s central bank (Sveriges Riksbank) in 1968 in conjunction with the bank’s 300th anniversary. The Royal Swedish Academy of Sciences bestows the award according to the same conventions governing the original five Nobel Prizes that have been awarded since 1901.

Nomination and selection process The nomination process starts a year in ad-vance when nomination forms are sent out to selected professors at universities around the world and previous Laureates in Economic Sciences, among others. The Prize Committee (with 5-8 members) then screens the nominations and selects the preliminary candidates, usually around 300. These names are then sent to specially appointed experts for assessment, before the Prize Committee submits its recommendations to the Academy. On 10 December, the Laureates receive their Nobel Prize, consisting of a Nobel Medal and Diploma as well as a document confirming the prize amount of 10 million Swedish kronor (since 2001). Prominent winners in financial economics The field of financial economics is today largely built on foundations laid in the 1950’s and 1960’s by Harry Markowitz, Merton Miller and William Sharpe (jointly awarded in 1990). The trio received the Prize for their work on diversification, modern portfolio theory and the capital asset pricing model (CAPM) – a model for pricing an individual security or a portfolio. Another seminal contribution came from Robert Merton and Myron Scholes (1997) who in collaboration with the late Fisher Black developed the Black-Scholes formula for valuing options, laying the foundations for the rapid growth in markets for de-

rivatives. Their contribution paved the way for economic valuations in many areas, generated new types of financial instruments and facilitated more efficient risk management.

Prominent winners in macroeconomics Numerous prizes have been given to macroeconomists. An influential economist during the second half of the 20th century was Milton Friedman, who was awarded the Prize in 1976 for his contributions on “consumption analysis, monetary history and theory, and the complexity of stabilization policy”. Friedman restated the quantity theory of money and developed the permanent income hypothesis. Friedman and Edmund Phelps (awarded in 2006) also developed the concept of the natural rate of unemployment, which represents the hypothetical unemployment rate consistent with aggregate production being at the longrun level.

Linc Magazine - May 2012 – 15 –

Nobel Prize in Economics

Quantity theory of money: the theory that money supply has a direct, proportional relationship with the price level.

four-fifths of the growth in US output per worker was attributable to technological progress.

Permanent income hypothesis: states that consumption patterns are mainly determined by changes in permanent rather than temporary income.

In cooperation with Merton Miller, Franco Modigliani (1985) formulated the important Modigliani-Miller theorem in corporate finance, stating that under certain assumptions, the value of a firm is not affected by whether it is financed by equity or debt. The foundations for today’s theory of open-economy macroeconomics were constructed by Robert Mundell (1999) in the so-called Mundell-Fleming model, portraying the short-run relationship between an economy’s nominal exchange rate, interest rate and output. The model has given rise to the “impossible trinity”, which states that it is impossible for an economy to simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy. Challenging the foundations of macroeconomic theory, Robert Lucas (1995) developed the “Lucas critique” of economic policy-making, which states that relationships that appear to hold in the economy, such as that between inflation and unemployment, could change in response to changes in economic policy. Emphasizing the role of expectations in macroeconomic analysis, Lucas is also renowned for analyzing the consequences of rational expectations among economic agents. While many of the awards to macroeconomists refer to contributions concerning short-term macroeconomic fluctuations, Robert Solow (1987) was rewarded for his contributions to the theory of long-term economic growth. Solow built a model describing how the process of capital accumulation generates rising productivity. Using his model, Solow calculated that about – 16 – May 2012 - Linc Magazine

Prominent winners in microeconomics A number of awards have been given for contributions in microeconomic theory. James Mirrlees and William Vickrey (1996) made pioneering work about the consequences of various limitations in information of individuals, showing that information asymmetries are very important for the functioning of insurance and credit markets. A more general theory of asymmetric infor-mation was developed by George Akerlof, Michael Spence and Joseph Stiglitz (all awarded in 2001). Akerlof illustrated the problems of asymmetric information with the market for used cars, concluding that owners of good cars will not place their cars on the used car market. This is known as “the bad driving out the good” in the market. Stiglitz analyzed the role of screening in markets with asymmetric information, while Spence became known for his job-market signaling model.

Screening is a technique used by one economic agent to extract otherwise private information from another. In the signaling model, employees signal their respective skills to employers by acquiring a certain degree of education, which is costly to them.

Nobel Prize in Economics

r = R∫ + β3 (Km - R∫) + bs ∙ SMB +bv ∙ HML + α

Frequently cited candidates for future prizes Eugene Fama is known for his work on portfolio theory and asset pricing, both theoretical and empirical. He developed the ground-breaking efficient market hypothesis, in which stock price movements are unpredictable and follow a so-called random walk. Fama and Kenneth French also designed the Fama-French three-factor model (see above) to describe stock returns. This is an expansion of the CAPM which uses only one variable, beta, to describe returns.

studies why markets are not efficient. In this context, Shiller has made important contributions on risk sharing, financial market volatility, bubbles and crises.

Anne Krueger famously coined the term rent-seeking in 1974, which now is a standard text book model. Krueger and Gordon Tullock analyzed how pressure groups manage to gain unfair advantages (rents) that come at the ex-pense of the rest of the society.

At the other end, Robert Shiller is one of the pioneers in the field behavioral finance, which basically

Did you know? • The Prize has been awarded 43 times to 69 Laureates since 1969. •The youngest Laureate was Kenneth J. Arrow who was 51 when he was awarded the Prize in 1972. • The oldest Laureate was Leonid Hurwicz who was 90 when he was awarded in 2007. • The first woman to be awarded was Elinor Ostrom in 2009. • At most three people can share the Prize. • Most Prizes have been awarded for lifetime contributions. • There has been a tendency to give early Prizes to particularly important contributions and to give Prizes in chronological order of discovery. •Several awards have been given for contributions on the borderline between economics, political science, sociology and history.

Written by: Jakob Nordmark

Linc Magazine - May 2012 – 17 –

Interview with Thomas Berggren

Saxo Bank Founded in 1992 by Kim Fournais and Lars Seier Christensen Employees > 1400 Nationalities: 57 Offices in 22 countries Financial instruments: 23000 Turnover: DDK 100bn/day

Interview with Tomas Berggren

from Saxo Bank

– 18 – May 2012 - Linc Magazine

Interview with Thomas Berggren

Background I was very interested in finance even before attending college, which made my field of study a no-brainer. I started studying in the U.S., where I read courses focusing on International Economics. I then moved back to Lund and started reading Economics. My involvement in LINC came shortly after attending Lund University. LINC was “on fire” at that time, being the middle of the technology-bubble in 1999. The LINC finance lab was a small janitor’s closet, with a total of four computer screens. People were standing outside the room in multiple lines to follow their dotcom shares. I was never a member of the LINC Executive Committee, but was involved in several different events that were aiming towards increasing the students’ knowledge of the financial markets. I was reading a lot about technical analysis at that time, believing that it was the solution “to everything”. We had evenings when we were discussing the markets, and had a very practical orientation which made it a perfect complement to the highly theoretical education given at Lund University.

Do you still believe Technical Analysis is the solution to everything? No, today I think it should be used for timing your trades, and I think that’s the way you should keep it. When talking about timing, I mean both intraday and in a longer perspective, because the fundamental world is moving slowly and it takes time for consensus in the markets to change direction. Of course you could have different views on this. There are different theories, like the Elliot Wave Theory, which is a graphical display of the trends in the economy or in an index. I believe it’s generally better to look at the volume patterns and moving averages than doing a strict short-term analysis using pointing figures, candle bars and so on.

How should we think in terms of our careers? You often gain the most by thinking differently. Today, a lot happens within equity research, brokerage, etc., which makes it a very interesting time to get a foot into the industry, even though it’s very hard to enter the market today. Crises are every innovations mother. This is what I work with every day - how to develop our analysis and our research to keep ahead of our competitors. The traditional institutional brokerage model is currently out for the count and I doubt that it will get backup in its current form. From my perspective, the question is how to produce research that the customers are willing to pay for as a stand-alone product.

What job did you aim towards when you started studying in Lund? I wanted to be a trader or a stock analyst. What I do today is one of them but not in the way I first anticipated.

How do you mean? Having an opinion about a stock is really about seeing the commercial interest. Why do people pay me to have an opinion about certain companies? It’s about finding a possible profit in the stock. Today, I have a global perspective but with a focus on a specific sector. My job is to find trends within this sector at the different markets, and to find the interesting companies. What we do at Saxo today is not to do our own projections, but rather to work with the consensus of the markets and then having an interpretation on that basis.

Linc Magazine - May 2012 – 19 –

Interview with Thomas Berggren

Why Saxo Bank? It’s Scandinavia’s most expansive investment bank with a culture based on entrepreneurship. It’s also one of the youngest of the major investment banks in Scandinavia. Being the youngest bank is a strength due to not having any ”sacred cows” to take into account; you do what’s considered good for the business. What I find most interesting, and what you probably get the feeling about when working for a while, is that the bank is very international. Depending on how you count, we have over fifty nationalities on the trading floor in Copenhagen, and about 40 languages spoken. This makes the working environment very stimulating, and we have got a very large knowledge-pool about local occurrences around the world by people who grew up and have contacts in their home countries. Think of it as a “mini-version of the UN”. That’s the main difference; you don’t find that international an environment at other banks outside London. Outside the doors of Saxo Bank it’s, obviously, different.

What do you wish you knew when you started working? It’s all in some way related to what you do as an analyst. Based on us as Swedes, we traditionally have shares as an isolated investment option. To begin with, we have been aware of the fixed income markets, but have never really got the hang of it. An investment can be much more than just going long or short in a stock. It could also include commodities and Forex trading to create your preferred risk exposure. Our product at Saxo Bank gives the same trading opportunities to private investors - only available to large institutions a few years ago. The traditional investment model where you have traders, brokers and analysts in which all focus on the same asset class, is under siege so to speak. It will most likely not exist in its current form in the future. The specialized stock analyst focusing on companies – 20 – May 2012 - Linc Magazine

within a specific sector in a specific region is today focusing more on a global perspective, or as in our case, a pan-European analysis, where you focus more on the sector allocation than on specific companies. This is where Saxo Bank has entered the picture. When I started at the bank we had a very clear objective to develop a product based on fundamental analysis that could ”shadow our trading universe”. Today, we can trade 25 different cash-markets (stock markets). You can get analyses from 11,000 different companies listed on stock exchanges around the world. This means that you, as a private investor, can get access to analyses containing the market consensus at a level that normally is only available to institutional investors through Bloomberg or similar. So we have developed a product that blurs the boundaries between institutional customers and what has been provided to private clients.

Can you describe how a normal day at work looks like? My work is about gathering and interpreting information, which might sound a bit dry but it’s very inspiring. From 7-9 o’clock, I read news. The art is not just to understand what you read, but also to be able to convey the findings/analysis in an effective, understandable and entertaining way. That’s why I don’t believe that an analyst can be replaced by a computer, who can read everything mathematically correct, and se patterns way faster than any human. I believe you still need a person to process the soft variables. I work in Denmark, and Danes are much less afraid of conflict than Swedes, which I like. The Germanic hierarchy does not exist in the same way here, i.e. they talk to their boss as you talk to a colleague. Swedes working with the stock markets have a strong position, as we have a longer tradition of buying and owning shares than what you have in Denmark, which on the other hand has a larger market when it comes to Fixed Income. Overall I would say there

Interview with Thomas Berggren

is little difference, but it’s very interesting to be able to live in Sweden and work in Denmark, if you want to. However, comparing working at Saxo Bank with working in Denmark is not the best comparison. It’s more like working in London considering all the different nationalities.

Any tips for the future? Don’t become an expert in a too narrow area. Analysis is about thinking broadly. It’s not about the knowledge you bring from the university, how to calculate WACC (Weighted Average Cost of Capital) and the like, it’s more about having the discipline to constantly assimilate new information, and to have the discipline to take a step back and look at a wider perspective when you think you understand something. Make use of different sources all the time; listen to people not working in finance to gain new perspectives. In some situations, what you are currently looking at might seem good, but when you look around there might be better alternatives when it comes to risk/reward. I bet the last people understanding Apple’s impending greatness were technology analysts at the large investment firms. You have to understand the history of an industry to really understand it. With looking at history, I don’t mean only looking 5 years back in time, but rather do it the “Warren Buffet way”, where you look 20 years back in time to see how the company has performed historically. Analyzing a sector takes time; you have to do a lot of research to really understand its dynamics. In the business where I work, a lot has happened over the last few years. A few years ago, nobody wanted to buy bank shares which had an ROE (Return on Equity) below 15%. Today, that’s almost an anomaly (Nordea was recently criticized for their goal of an ROE at 15%).

How do you think looking at history works now, considering the current market turmoil and changing market conditions?

Well, that’s somewhat the point and what analysis is all about. To find new ways, your own ways, and come up with something that might resemble the truth. Along the way, you will most likely get stuck in your own preconceived notions that will lead you along the wrong way, but that’s part of the game.

What do you think about the current macroeconomic situation in Europe? I’m no macro analyst. I’m also no expert on this subject. However, from a layman perspective, I would say Portugal and Spain will take up a lot of time before this summer. They will be crucial for the banking sector that I follow, but also for the general development in Europe. I also see a cloud in the horizon: the Eastern European resilience. With the economy, we often talk about government debt and the welfare of states. What you easily forget is: when ECB is pumping out money in Europe, the purpose is to create liquidity and to get something, but what? We call this phase “extend and pretend” - you try to buy yourself time. You want to get the banks to take risks and at the same time decrease their leverage. The equation becomes difficult if they also have to lend money to companies, giving them sufficient working capital, make investments, and so on. Without a healthy banking system, Europe is doomed to fail, and so is the euro. I recently made an analysis of the Austrian banks’ exposure to Eastern Europe and how it can spread to the core of Europe. This analysis is published on www.tradingfloor.com, where we at Saxo Bank basically publish all of our analysis for free. Greece today is, as I see it, a finished chapter when it comes to the most imminent risk in Europe. Today, Spain is the big risk. Spain is also much linked to the Iberian Peninsula that will be in play until the summer.

Written by: Andreas Schou Kongstad

Linc Magazine - May 2012 – 21 –

Sports: investing in the future

Sports: Investing in the future Can you feel the excitement in the air? It’s that special time of the year when mixed feelings and emotions are running through each and every one of us. Emotions of joy and happiness for a lucky few, but sadness and distress for many others. It’s playoff time. All the big sports leagues are coming to an end and some stand as winners and triumphantly raise the trophy, while others stand on the losing side, having to accept failure.

port today is, however, much more than trophies and feelings. In today’s economy, the sporting industry means big money. Transfers and deals around the star players exchange huge sums of money. The sponsorships, commercials, VIP tickets, TV-deals and new arenas are making sport one of the biggest entertainment industries in the world (Estimating the total turnover of the industry is nearly impossible. However, the TV-rights for the Premier League were valued at 15bn SEK (£ 1,39bn) in 2010) More than one of us has surely dreamt of becoming their own Abramovich, owning your own favourite team, and being part of their coming success. – 22 – May 2012 - Linc Magazine

And you can do just that, with some exceptions. First, your favourite team should preferably be located in the US. Second, your favourite team has to be traded on one of the stock exchanges around the world. Now you are all set! Follow this guide, and it will tell you everything that you need to know on your way to becoming the owner for that special team of yours.

et’s back up a bit and go through the various types of methods you can use to organize a professional team. In Sweden, for example, the most commonly used type is a form of economical union. In the US, organizing your team as a union is often prohibited by the central administration, such as the NFL or NHL, and therefore (all except Green Bay Packers as long as this research goes) formed and organized as regular businesses. However, the teams you can invest in are really scarce. During the research of this article, I have examined over a hundred teams. Of all the teams in the NHL, NFL and NBA you can only invest in two: New York Rangers and New York Knicks, and the same company, Madison Square Garden, owns both of them. Madison Square Garden is an entertainment promo

Sports: investing in the future

tion company, with the New York Rangers and the New York Knicks being their two diamonds. But they also invest heavily in all different kinds of entertainment.

hat is the first step for you: to find a company. This is, however, not as easy as it seems. To conclude, it would be wise to see some of the dangers with investing in these kinds of companies. First of all, think of the competitors. This is not limited only to the rivals in your own league. Different sports compete with each other, and they fight hard to get the best sponsor/TV-deals. It is a world where only the toughest survives. The company you invest your money into must be able to deliver top quality day after day. Determining the quality of the product is not as easy as it might sound, and often the right approach is “earn money by spending money”. You, as an owner, need to make the cut: determining at which point the spendings hit the roof and quality decreases.

he entertainment industry is one of the largest industries in the world, and sports companies compete with rivals like cinemas, restaurants, music, and even some-

thing as ordinary as an evening at home. The company you invest in must stand out from these companies and deliver something different and in many cases something better. Then, and only then, can you attract consumers and make them choose to attend your company’s event.

dditionally, you must think about the employees. In this industry the people you employ are a special sort: they are stars and tend to do a bit as they please. The management of the team has a huge responsibility here, assuring the investors and the owners of the company that they can manage these stars and make the most out of them. As an investor, you have to acknowledge the fact that the team star might want to transfer to a new club, and without this star the value of the company might decrease. However, if you are willing to take these risks, and can see the excitement in the competition and badtempered athletes, you are in for a real treat. Sport is one of the biggest entertainment industries in the world, and the train has yet to leave the station. If you jump on board, you might get the ride of your lifetime.

Written by: Simon Andersson

Vill du vara med och utveckla tredje upplagan av

Linc Magazine? Maila till oss på magazine@linclund.com

Linc Magazine - May 2012 – 23 –

The Hedge

THE HEDGE WHAT IT IS

AND WHAT IT IS NOT

An essay about the hedge fund industry

Said Gordon Gekko of Wall Street fame, ”We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it.” Indeed. Stare and gaze. Pick and choose. On any given day, at any given hour, there is confusion on Main Street. Albeit being a major source of the capital that drives the financial world: Little do they know and little do they care. They rose up one day, early in life, and walked down boulevard that is Wall Street. They passed the Chase Manhattan Plaza, the New York Stock Exchange and looked upon the grand world of finance. Engulfed by bankers now famously astute, they stepped inside, brought off their coat and, seemingly without consideration, made one of the more important decisions of their lives. They deposited their sack of money, assigned it to any or one manager of funds, turned around and never looked back. They went back home, lived their life and did not give Wall Street the slightest thought until they entered the beautiful mist of retirement. Good or bad, ugly or fine, this is how the major part of Main Street handles their lifetime savings. They are by most accounts cautious and risk averse. Interested in preserving rather than growing their capital. They are fond of what is long-only: Adhere not to the practice of betting on price decline. Which, by all means, is fine until it is not. For the economical cycles are where they are: There are times of prosperity and then there is not. The strategy of theirs, however, has no safeguard against the instances when ‘there is not’: The inevitable downturn. Because they are as likely to retire in good times and in bad; Just by pure and bad luck it may very well be with the savings – 24 – May 2012 - Linc Magazine

and future pilgrimages to the sun vaporizing before their eyes. Which is all but a pretty sight. And, so, be it their salvation or not: Their relief or not: It may be well to acquaint ourselves with the hedge.

Said Gordon Gekko, ”It is a zero sum game, somebody wins, somebody loses. Money itself is not lost or made, it is simply transferred from one perception to another.” In all fairness, everything begins with the stock market and everything is all about money. Money can be made by buying, taking a long position on, undervalued stocks hoping that they would appreciate in value. Money can also be made by selling short, borrowing overvalued stocks from a seller, hoping that they will depreciate in value and thus could be bought back at a lower price. This has been the essence of the trade since the inception of the market and is all done in name of the everlasting quest for true value. The value is often searched for but rarely reached: And people have gone long and they have gone short with this same end goal of reaching this true value. Because only a fraction of the investors of the past used to go short, however, these short-sellers, throughout the ages, have been blamed for the better part of the financial troubles occurred to date. They have been liable to imprisonment under Napoleon, still are so in Islam and were, for a limited period of time, banned by several countries and their legislators during the latest financial meltdown. With media describing them as scavengers, infringers and fraudsters, the

The Hedge picture is not, to say the least, rosy. And there is thus little wonder that the major part of Main Street does not acquaint themselves with the instrument of going short. They are quite eagerly pressed upon the notion that short-selling could cause them harm and, worse, be immoral and wrong. To set this record straight, then, it may be very well to acquaint ourselves with a fair opinion before proceeding. (On the note of the Léfevre quota: Being bearish is the equivalent of having a negative perception of the market and is, hence, the opposite of being bullish; How the investors describe themselves when considering the market sentiment as positive. Bear raiding, then, is equivalent of short selling.)

Said Edwin Lefévre in Reminiscences of a Stock Speculator, ”The public ought to grasp firmly this one point: That the real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline. As a matter of fact, the only time a bear can make big money selling a stock is when that stock is too high.” So, if considered in moderation and in sound mind one could quite possibly see the legitimate use of short-selling: Namely in times when valuations get out of hand. This was, also, what struck the Harvard graduate, Columbia sociology doctorate turned Fortune editor and attributed father the modern hedge, Alfred Winslow Jones, some sixty years ago, ”The logic of the idea was very clear. It was a hedge against the vagaries of the market.” For while a hard and thorough look at the external factors of the market ”are supposed to (and in the long run do) determine the prices of common stocks”, wrote Jones, ”in the [short term] awkward things get in the way (and in the long run, as Keynes said, we shall all be dead).” He noted that there are periods when the market is ”notoriously out of gear with the underlying fundamentals, hence the … method of judging the market [is] of little help.”

Now, this is no new phenomenon. In prosperous times human greed perceive outlooks better than what they really are. The greed blinds man. He can see no wrong and cannot stop himself from buying. Which, in essence, causes the prices to be driven up to levels where they do not belong. They reach heights far above their true value. This, as is said in the beginning, is all for to the good as long as it lasts. There is no fault in being long-only in these instances. Because no time is different, however, it can never last. The market is bound to turn. And when it does, as Jones figured, an investor with exposure only on the long side will suffer greatly. Because he was not at all fond of this, he wanted to sell short and thus hedge himself from such instances. And as time would have it, at any given moment, there are stocks falling more than average while others are rising more than average. This means that if you could put together a portfolio through buying (going long) what is best and selling (going short) of the worse, you could hedge yourself against a sudden downturn and achieve returns no matter the economic condition. In addition, as Peter Landau put it in New York Magazine, ”the [hedge] funds are able to be more aggressive with the stocks they buy because they have a hedged position. It is their ace in the hole that they have something going for them if, for instance, the market were suddenly to fall out of bed.” What he concludes is that because the hedge fund holds a certain amount of short positions, and thus are protected from a major decline on the long side, the manager could afford to use more leverage, borrow money to increase exposure, than what he initially could have. This can provide him with better returns than funds limited to only being long. And that was what Alfred Winslow Jones did. And that was how the modern hedge was born. In time, giants like Warren Buffett and George Soros were attracted to the idea, and in the 1960s 130 hedge funds saw the light of day. This slowly gained momentum and the 300 funds registered in 1990 grew to more than 10,000 2010. (The capital under management amounts to $1.9 trillion and is equivaLinc Magazine - May 2012 – 25 –

The Hedge lent of 1.1% of the total funds and assets held by financial institutions.) Where Alfred Jones’ practiced short selling and leverage as a safeguard, however, hedge funds today are, as one manager put it, ”Simply a matter of using all tools available to us.” They are not regulated the way the aforementioned, long-only mutual funds are. This means that they can employ whatever strategy that presents the best opportunities at any given moment. They will therefore go both long and short, use leverage or derivatives, and invest in many markets. The modern hedge fund is thus defined by this freedom of choice rather than its hedged nature. It still pays off, though. Performance data from a hedge fund index equivalent to the S&P 500 have - for the last ten years - shown that they have been able to outperform the latter by their ability to minimize drawdowns. The index experienced only two down years while the S&P 500 had four down years. “This […] demonstrates that you do not need to outperform in up months in order to outperform,” said index composer Charles J. Gradante, “The most value-added characteristic of hedge funds is their down side risk management.” However great, Peter Landau justly observes that; Considering the practice of using leverage and short positions, ”Obviously hedge funds are not for everyone. For just as hedge funds multiply the chances of success, they also greatly magnify the chances of loss.” He recalls the words of Gerald M. Loeb, a veteran observer of Wall Street, ”The priceless ingredient in a hedge fund is its management. In anything but the most capable hands … it can produce more than average difficulties.” There is, hence, no great offense against keeping that long-only mutual fund as Main Street’s premier choice. Because not only is it regulated so as to avoid the greatest mishaps: It also provides a safeguard -

– 26 – May 2012 - Linc Magazine

for the condition of the world - against the majority of managers observed as everything but ”most capable”. And these, dear and fellow ladies and gentlemen, are incredibly amiable traits. They are also - for every one of the men and women who are yet to rise up, yet to walk down the boulevard that is Wall Street and yet to deposit their savings and never look back great news. They shall be fine to the extent that they can be. And they shall be able to live happily ever after. Should there come a time, however, when they are down and troubled by the great rumors of the scavengers of shorts; When they are contemplating what to think and what to think not; What to do and what to do not: There is reason to reassure them, calm them and tell them that, through the words of Edwin Lefévre, ”There never is anything new on Wall Street, because speculation is as old as the hills. [And] they say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. [… ] In a bull market you must trade with the bulls; Whilst in a bear market you must trade with the bears.” And that is all said. And that is all done. There shall still be confusion on Main Street, and there is little that can be done to change that. But they need to fear not. Because those bulls and bears, animals alike and different only in character, are all there is to it.

Written by: Oscar Frithiof