Creative financing

[Zimonya]

Hi guys,

Just a question to those boffs out there who are also into the creative side of things. I have a mate at uni who recently did a finance course for his Bcom degree and was telling me that they reckon that one of the best ways to build a portfolio is to 'put or short' sell bonds (I think that is the correct terminology for selling shares now that you do not own with the intention of replacing them later) and invest the money in bank's stocks as they reckon that this portfolio results in the best risk & return combination.

I do not know if I have grasped the concept at all or if it is possible to short sell bonds but that is basically how he described it to me. I was just wondering if it would not be possible to do a similar thing and put the money into property.

If it were possible would it be a kind of way of cutting out the banks margin and accessing cheaper financing without having to organise vendor financing?

I expect that the difficulty would be in finding a stock broker that would be willing to let you do it. Anyway I am just hoping that someone brighter than me might be able to shed some light. Thanks for your help.

Regards

Anthony

[Medine]

Hi Anthony,

As I see it, it's not the stock broker that would be the problem here, it would be the liquidity.

For example, say you sell $250,000 of bonds, hoping that the price will go down and you'll be able to buy them cheaper in the future. You use this money to buy a flat. So far so good :o .

BUT then the bond market turns and you need to buy those bonds quickly to avoid a large loss. So you sell your flat to get the money to buy the bonds back. But this takes three months, and in the mean time the price of bonds has gone UP :eek: !!

If you had bought bank shares with the money, you'd be able to sell them quickly to buy back the bonds.

Just my opinion :) !

Cheers, Medine

[asdf]

Not quite sure how you can short bonds if you're a private punter. Traders who work for financial institutions may do it but then they would have to go out and borrow to deliver on the sale. Easier for these guys to just short the futures so theres no delivery requirements with the physicals. You can also try to short shares but have to pay a funding cost to borrow the shares you've just shorted. Its a facility that some broking firms offer like MBL but its not without its restrictions and you guessed it - fees! And its not offered to just any ordinary punters. There are cheaper forms of financing than trying to short assets. This is obviously just my opinion though but its been a while since I was at uni so perhaps the lecturers have devised a new trading strategy we dont' know about.

[nat r]

I think you will find his strategy is aimed at a funds management audience where this "capital structure arbitrage" is common place.

It does't really apply for a personal investor.

It is also far from risk free....in May of this year many major funds lost massive amounts of money on this same trade but applying it to Ford and General Motors.