Hedge funds and short sales. An open debate

IE Focus - Hedge FundsIE Focus | By Rafael Hurtado, Professor at IE Business School

The collapse of the stock market has highlighted the shortcomings of the hedge fund system of short sales and fuelled debate on the need to set limits and rules for this type of operation.In recent months, and in particular after the great crash of the stock markets as from September 2008, the hedge fund system of short sales has been a subject of analysis and debate by many players on financial markets. The consequences and system of short sales are a source of great controversy in the financial sector.

Short sales take place through the loan of securities. A short position (short sale) takes place through the sale of an asset that is not held by the investor, but borrowed through an intermediary and later bought to pay the loan. The profit is obtained if the initial sale is completed at a higher price than the purchase price. With a short sale, the investor obtains greater profit if the price of the asset falls.

On many occasions, hedge funds not only involve short sales, but also use a significant amount of leverage. For a short sale, an intermediary must lend a certain number of shares. Some companies say that they have uncovered signs of their shares being lent as part of a chain. This type of transaction involves further risk.

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New times, new concepts

1812IE Focus | By Enrique Dans, Professor at IE Business School

The concept we have had of computers to date is set to disappear under a landslide of Internet realities that offer a new way of working online. Google´s announcement of its project to launch an operating system, Google Chrome OS, is not just another announcement in the hyperactive wasteland of technology news. The announcement is something more than that. It is a change of concept that affects the definition of a computer and what we do with it. Something that is going to change the way we work.

For many years now a computer has been the machine used to do the same things that were done without it, only more quickly and more efficiently. The word processor was a post-modern typewriter that produced results that were aesthetically better in less time by separating the composition process from the printing process. The spreadsheet was a “calculator on steroids”, which avoided the sequential repetition of chains of operations by placing them on coordinates. A bookkeeping or salary application was the fast way to tackle a monthly task that was both tedious and repetitive. For workers, a computer was a machine they used for doing the same thing, but more quickly. And to do that, they needed hardware, an operating system and the right applications. Last century´s computing system: buy a computer, which comes with a large, heavy operating system “that has everything” (including a computer and a game of solitaire!) and then buy the programmes you need to “do things”.

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People management in the project era

IE Focus - People ManagementIE Focus | By Kenneth Dubin, Professor at IE Business School

In an environment marked by uncertainty, scant resources and a lack of interconnectivity, people management should be based on structures that are more horizontal and less formal coordination systems.The present crisis should mark a before and after in human resources management. Politicians and social players will (or may not) reform the employment market and the labour relations system. However, for businesses and managers (and also for employees), the change is a must: yesterday´s competitive strategies have expired and taken with them the (bad) habits we acquired in people management.

The current situation is defined by uncertainty, the shortage of financial resources and the revolution of inter-connectivity; new business commitments in both SMEs and multinationals must be quick, flexible and innovative. This means working by project and generating value through knowledge rather than capital resources. Projects require collaboration between the functional areas of the company and also between the company and external agents (suppliers, other businesses and, more often than not, clients) and who may be located far from Spain.

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White brands: heroes or villains?

White brands: heroes or villains?

IE Focus | By Carmen Abril, Professor at IE Business School

Things are not often black or white, but rather tend to come in varying shades of gray. The world of white brands is no exception. They are no better or worse than other products, but they are certainly competitive.We are currently witnessing a controversial debate on white brands in Spain owing to the rapid growth they have enjoyed in recent months, where they have reached 38% of the sales of packaged large-consumption products.

As a result of this situation, which, on the other hand, is nothing new, many manufacturers, such as Danone, Nabisco and Kellogg´s, among others, have launched a massive advertising campaign to clarify certain concepts that consumers supposedly confuse regarding the manufacture of white brands in the hope that the message hampers their growth.

The importance of the issue and the controversy it has caused is worth taking a look at. First of all, we should start by giving this type of brand its correct name: if, by white brands, we understand undistinguished products based purely on their composition and ingredients and directly comparable with others, such as generic drugs, the name given to these products is incorrect.

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International experts in Social Entrepreneurship meet at IE University

On July  9, 10 and 11 IE University, in collaboration with the Social Entrepreneurship and Education Consortium (SEEC), hosted a conference for international experts in Social Entrepreneurship in Segovia.  This event, organized by IE professor Rachida Justo, was the first international workshop in Spain on Social Entrepreneurship. The conference was joined by experts from over 20…

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Free Competition and Good Strife

IE Focus: Free Competition and Good StrifeIE Focus | By Miguel Herrero de Jáuregui. Professor. IE School of Arts & Humanities
In the light of recent events the dogmas of economic theory have been brought into question, with perhaps one exception: free competition, as defended by the Ancient Greeks.
Many dogmas of classical economical theory have been hastily reviewed in recent times. But I am led to believe that there is one which resists criticism from almost all sides, apart from a few nostalgic diehards. Free competition seems to stand today as a pillar of new and revised models much as it always has from the times of Adam Smith. The first theories on the benefits of competition are, however, much older. In Greece, more than 2,700 years ago, Hesiod began his Works and Days with these lines (see this previous post on translation of ancient poetry).
So there was not only one race of Strifes, but all over the earth
there are two. A man would praise the first one after understanding her.
The other is blameworthy: and their spirit is wholly different.
For one fosters evil war and battle,
being cruel. No man loves her, but men, forced
by the will of the inmortals, pay honour to harsh Strife.
But the other was born the first from dark Night,
and the son of Cronos, who sits above and dwells in the aether, set her
in the roots of the earth: and she is much better for men.
She wakes up even the shiftless to work;
for a man grows eager to work when he sees another
rich man who hastens to plough and plant
and put his house in good order; and neighbour vies with his neighbour
as he hurries after wealth. This Strife is good for mortals
And potter is angry with potter, and craftsman with craftsman,
and beggar is jealous of beggar, and bard of bard.
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Subprime mortgages in Spain: do they exist?

IE Focus - Subprime mortgages in SpainIE Focus | By Antonio Rivela and Ignacio de la Torre. Professors. IE Business School
In spite of the real estate bubble, Spain has suffered relatively little fallout from subprime mortgages. Is that because they don’t exist? They exist alright, but they are well controlled.
When commenting on how a high-risk mortgage (subprime) was turned into a fantastic AAA-rated bond backed by prestigious rating agencies through the magical art of financial engineering, the prestigious North American investor, Warren Buffett, said “you can´t make a silk purse out of sow’s ear”. A subprime mortgage is a mortgage loan awarded by banks to customers that have no credit record and, in many cases, no proven income. This process for converting “sow’s ears into silk purses” (the mutation of subprime mortgages into bonds with the highest possible credit rating) was implemented through securitisations and it is of key importance for understanding the financial debacle facing the West.

However, many foreign analysts are asking why the subprime hurricane has had hardly any effect on the Spanish market in comparison with its impact on the North American or British banking market if, in theory, Spain was on a similar track (housing price bubble, high credit penetration and runaway foreign deficit). Although many have responded to this question with apocalyptic visions, it is our opinion that the actual situation is much less dramatic. In this article, we will make a detailed analysis of this opinion as objectively as possible.

As was pointed out by Alfredo Sáenz, CEO of Banco Santander, subprime mortgages do exist in Spain. However, his statement needs to be explained: yes, they do exist, but to a much lesser extent than in other markets. Where do they come from? There are two basic ways in which the subprime disease can be caught: by awarding subprime mortgages or by buying securitisations linked to subprime risk. If we analyse the first of the phenomena, there are four very good reasons why hardly any subprime mortgages have been awarded in Spain:

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Liquid technology

1739IE Focus | By Enrique Dans, Professor at IE Business School
Politicians, entrepreneurs, and even some governments are trying to hamper the advance of technology. But technology is like liquid in that it can seep through into every aspect of our lives.
Liquids are known for their ability to always adapt to the cavity that contains them and for penetrating permeable surfaces. Modern-day technology is like a solid: it exists in watertight, well-defined compartments. It is associated with specific devices, specific functions and specific sectors of the public. There are generations that are impervious to technology, that refuse to soak it up as if it were trying to replace or detract from rather than complement their activities.

There are politicians who try to stop it, as if that were possible, as if those who oppose technological progress had ever won a battle against it. There are companies who confine it to specific functional areas or restrict it to specific personnel and there are even countries who try to block it so that citizens cannot gain access to it. We constantly come up against situations in which our options for using technology as we would like are scant or even non-existent due to not having access to a certain device, not having connectivity or a power supply, or to pure and simple ignorance.

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