Hedge funds and short sales. An open debate

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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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People management in the project era

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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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Subprime mortgages in Spain: do they exist?

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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

Academics
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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Don't say CRISIS, say Opportunity!

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1729IE Focus | By Manuel Bermejo, Professor at IE Business School
The long honeymoon that the Spanish economy has enjoyed means that many senior managers have not yet had to rise to the challenge of a crisis. The moment has come for a complete change of the way we think and manage.
The current period of crisis and uncertainty is leading to tension and difficulties for company managers. In addition, owing to a lengthy period of growth in recent years, a good part of the senior management of many businesses has never had to face the challenge of managing a company with the wind against them.
It is time to recover a strategic view and act differently since the outlook has changed radically in recent months. Therefore, the first consideration would be to move away from old paradigms that almost certainly cannot be applied in today’s world. We need to adapt to the new context and, as human beings, that is never an easy task. With this in mind, I offer the following Decalogue:
– Management by values: I consider it fundamental to recover values such as austerity, honesty, long-term vision, strategic alignment, commitment, work, perseverance, social responsibility… It is not a matter of earning money at any price and ignoring everything else. Speak with many family business owners and you will find magnificent examples of what I am talking about.

– Strategic thought: separate what is urgent from what is important. Many important issues are never approached and give rise to situations that are unsustainable in the long term. Government bodies must be created as true watchtowers to gain a peripheral view and take decisions that anticipate change. In all sincerity, many of today’s difficult situations could have been foreseen some time ago and corrective measures could have been taken, but sometimes you can’t see the wood for the trees.

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Beyond stereotypes

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1728IE Focus | By Celica de Anca, Director Centre for Diversity, IE Business School
The women’s leadership debate and the reasons that there are still so few women on boards of directors will come to nothing if we keep referring to the same old male and female stereotypes.
McKinsey recently published its Women Matter 2 study, in which it drew the conclusion that the women leaders analysed used certain styles of leadership that had a direct effect on the company’s performance more often than men’s styles. Women’s leadership styles involved people development, intuition and participatory decision-taking.Other studies along the same lines have insisted on the need for including more women in corporate bodies of management owing to their different leadership styles. However, despite the scientific rigour of the analyses, the same number of scientific studies can also be found to demonstrate that the presence of more women in senior management does not necessarily improve a company’s performance.

Accepting these studies as valid, I believe that in order to move forward in the issue of women in business leadership, certain untruths that add confusion to the debate must first of all be clarified.

The first is the search for reasons that justify something which, in my opinion, does not need justifying. Women represent half of the world population and 46% of its workforce. Some of them are competent and others less so, some are more qualified and some less so. Indeed, some of them are not qualified for senior management posts, most probably in the same percentage as men who are not qualified for positions of responsibility. In the globalised and competitive society of the 21st century and in the interests of corporate effectiveness there is no room for maintaining barriers that prevent talented or valuable women from taking up posts in senior management. The barriers we imagine exist, albeit indirectly and subtly, limit, for example, the number of women who sit on boards of directors to only 6% of the top 800 European businesses. Scandinavian countries have the greatest number of women on their boards of directors and the countries in the South of Europe have the lowest number. I hope there are other factors that explain what could otherwise be put down to Swedish women being more talented than their Spanish counterparts.

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IE Business School and Brown University: New approaches to Academic Entrepreneurship

Academics Go for IE

A joint initiative for research and training for commerce, entrepreneurship and organizational Management IE Business School and Brown University are delighted to announce the formalization of a multifaceted relationship, bringing together one of Europe’s leading business schools and a leading North American research university. Brown and IE share a commitment to academic excellence and to…

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Marketing in times of adversity and stress

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Marketing in times of adversity and stressIE Focus | By Roberto Alvarez del Blanco,  Professor at IE Business School
Taking the scissors to the marketing budget is an all too familiar reaction in times of crisis, but it is a mistake that can weaken the brand and hamper attempts to differentiate a product.
The current severe market conditions mean that marketing decisions have to be based on certainty, decision and courage. Avoiding mistakes that imply significant conditioning factors in the mid and long term is as important as managing the crisis. Skilfully solving this new paradox requires fast solutions and consideration of long-term implications. Peripheral vision is also essential to see and interpret the signs, and identify useful solutions for planning a more stable future.From a marketing viewpoint we are facing vast complexities, but it is also a time of extraordinary opportunity. It’s true that challenges are on the increase, that some models are more vulnerable, or that negative signs can be seen on the horizon, but we have to find a way through the jungle and healthy economic options for the brand must be created, all without dying in the attempt. The pressure of the scant room for error can be relieved a little by remembering an old Spanish saying: be eager when others are being cautious and be cautious when others are being eager.

In times like the present the great temptation is to cut back budgets, and marketing is often the first to suffer. It is vulnerable because of the search for fast results or survival and because it is assumed that reducing marketing efforts does not have any short-term effect. The current climate requires the consideration of a number of priorities to avoid missing out on opportunities or committing irreversible errors and accepting that Lady Luck smiles on the decisive in times of crisis.

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Improving productivity as a formula for beating the crisis

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IE Focus - Improving productivity as a formula for beating the crisisIE Focus, March 2009 | By Jorge Diezhandino. MBA part-time 2005,  IE Business School;  Senior Consultant at Alfa Consulting
There are no magic bullets here. The only cure for the virus that has infected the economy consists of reinventing companies so that they produce more using the same resources.
Except for the odd diehard optimist, nobody has any doubts now that the present financial crisis affects all of us to a greater or lesser extent. The banking sector, the construction sector and the car industry all show signs of the effect it has had on their bottom-line results and, in turn, on their workers´ pockets. Furthermore, the effect is spreading and many are now making disastrous forecasts for the ancillary and services sectors.

According to José María O’Kean, Professor of Economic Environment at IE Business School, “there are elements in Spain that can help mitigate the immediate crisis, such as tourism and, to a certain extent, exports, but the model is still one of low-level productivity”. Indeed, as far as the present situation is concerned, replacing the construction sector with the tourist sector and support from exports is logical, but maintaining such a low-productivity model means not only failing to improve our business sector’s competitiveness, but also increasing the difference with those who, in this environment of change, are doing just that. Consequently, only the businesses that successfully assume the change required for improving their productivity will successfully overcome the crisis and come out strengthened at a time when, more than ever, it is essential to reduce costs on the value chain.

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The prosumer and new social advertising

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IE Focus - The prosumer and new social advertising IE Focus March 2009 | By Manuel Alonso, Professor at IE Business School

Let’s face it, the customer is always right, and this long-standing truth is growing truer by the day thanks to new technologies. Traditional marketing doesn’t work anymore.
The main effect of the exponential technological development of marketing in recent years has been the increase in consumer power in commercial relations. We have to accept the situation: the consumer is in command. He is no longer an isolated person bombarded by commercial strategies that lead him to take purchasing decisions. He has his own opinion, which he can say very easily through digital channels, directing it not only at advertisers, but also at other consumers, over whom he has huge influence. It is very easy to gather from this statement that usual advertising has abandoned the traditional unidirectional format to become not bidirectional between brand and customer, but rather multidirectional, where customers exchange information with each other.

Bearing in mind this situation, it comes as no surprise that the 2007 New Year cover Time magazine always dedicates to the person it considers as being most important in the previous three-hundred-and-sixty-five days was dedicated to you, and me, and each and every one of us, since we are at the helm of the new information era in which the consumer has become the prosumer: he has unlimited options for choosing products, for comparing them, for hearing other buyers´ opinions, for influencing manufacturers and advertisers… And all that power is making him more difficult to reach using the staler advertising formats, especially in the cold, corporate tone.

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Personal Brand Management

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1685.jpgFebruary 2008 | By Guillermo de Haro, Professor at IE Business School

We all have our own personal brand, and Personal Brand Management can help us to enhance our image using the same techniques that enable companies to sell themselves better.
Valuing things is always complicated. As someone once said, “only a fool confuses value with price”. In The Undercover Economist, Tim Hartford also gave a masterful explanation of how the utility (and, therefore, the perceived value) is different for each product or service, for each individual and even for each situation, and the price is a key element for making the system work, making it more fluid. That´s why putting a price on something is so complicated. And if we also try to put a price on ourselves, it is even more complicated. If you don´t believe me, ask people how much you are worth.

In Saxon cultures, they have no problem: you are worth as much as you earn. Nowadays, there are certain subtleties. If we ask a BoBo (Bourgeois Bohemian), they give more value to a million dollars that come from a book or a new company than from speculating on the stock exchange, something that would be valued very highly by a yuppie. And if I ask my mother, I would be listed on the stock exchange in less than 24 hours and I would also guarantee its recovery.

In my classes, I always tell my students that we should think of ourselves as another company. This exercise helps them gain a better understanding of things thanks to a new viewpoint that involves us in decision-taking processes. We can calculate our results account, value ourselves as an asset and value our assets, as well as determine our liabilities. And, as such, we can speak of the value of our brand and start thinking how to manage it.

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The way out of the crisis

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1663.jpgJanuary 2009 | By Rafael Pampillon, Professor at IE Business School

Spain has the same symptoms as those that preceded the Great Depression. And just like then, the only way forward is to facilitate loans and increase public spending.

My colleague and friend Pedro Schwartz published an article (“Is Pampillón wrong?â?) here on 31 October in which he expressed his disagreement with the economic policy measures I propose for putting this economic crisis behind us. How does he differ?

1. Professor Schwartz disagrees with the diagnosis, and this is most important since a realistic diagnosis is fundamental if the right policies are to be applied. He considers that, although we are experiencing an ebb of the cycle, we are not on our way to a depression like that of the 1930s.

My diagnosis is different, since I consider that the Spanish economy is in crisis owing to an insufficient aggregate demand of unknown proportions and that, if we do not apply the right measures, we will very soon enter a long, deep recession.

We must remember that the Great Depression of the 1930s came from a fall in demand, which led to high levels of unemployment, negative economic growth and deflation. To overcome that crisis, expansive aggregate demand policies were applied, together with increases in public spending.

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