1. In the following hedge fund example:

And lets start with a whole new scenario. I'm the same hedge fund. Ive got $100 million. And this time I have a hunch that Lehman Brothers is going to go down. So I go to some company lets just say AIG. I go to AIG and I say I want to buy a credit default swap. Im not selling this time. Im buying. I say to them, I will pay you $20 million a year. And the deal is if Lehman goes down, you will owe me a billion dollars. Now, over the next few months, my hunch starts to look more likely, because Lehman starts looking riskier. Their profits go down. Unfavorable news reports come out about them. And when this happens, they become, basically, more expensive to insure. Just like the more traffic accidents you have, the higher your insurance premiums go. The sicker you look as a company, the more it costs to buy credit default swap protection against you. And I, now, am perfectly poised to take advantage of this situation. I now go out on the market, and I sell credit default swap protection. But because people are more scared about Lehman, the price is higher. I can now sell it for 40 million dollars a year. So I'm paying 20, but taking in 40. Again, a net profit of 20 million dollars a year. But this time, my position is what they call hedged. My position is totally safe. If Lehman defaults, I will owe my buyer a billion dollars, but AIG will owe me a billion dollars. The trade totally nets out.

In this example, why can the hedge fund sell the same CDS at a higher 4% per year(1bil * 4% = 40mil) a few month later? Analyze the cashflows for the hedge fund. (When Lehman is in business and when Lehman bankrupt. ) Is there any cashflow problem should Lehman go bankrupt? Is there any risk involved in these paired-CDS trades for the hedge fund?

2. Is hedge fund really engaging in low risk trades as they always claimed?