Odd Lots How Banks Turned Into Giant Synthetic Hedge Funds
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Feb 21, 2025 Elham Saeidinezhad, an assistant economics professor at Barnard College and NYU, dives into the evolving role of banks as they adopt hedge fund-like strategies. She discusses the fallout from the Silicon Valley Bank crisis and questions the lack of significant reforms. Elham highlights how recent regulatory relaxations have allowed banks to blend traditional lending with complex trading tactics, creating a new breed of 'synthetic hedge funds.' This shift raises critical concerns about risk management and regulatory frameworks in today's financial landscape.
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Synthetic Hedge Funds
- Banks are becoming "synthetic hedge funds," replicating hedge fund activities.
- They pursue similar returns and risks without being actual hedge funds.
SVB's Swap Spread Bet
- Silicon Valley Bank (SVB) used interest rate swaps like a hedge fund, not for hedging.
- They bet on swap spreads widening, mirroring a fixed-income arbitrage strategy.
Subscription Lines as Synthetic Private Equity
- SVB used subscription lines, offering low interest rates to private equity fund managers.
- Banks profit when fund managers default, becoming synthetic limited partners with higher returns.