26 January 2011

Absolute Return = No Return?

More and more investors are following the siren songs of the asset management industry and put their faith in the rapidly growing offerings of 'absolute return' funds and investment products. Apart from the fact that providers usually charge higher fees for these vehicles investors should also be aware that the word absolute may have a meaning in other connections but when it is used to describe an investment product's properties it can at best be called nebulous. A quick look at the definition of the word demonstrates that the following meanings can be associated with the term: supreme, total, unadulterated etc. All these connotations have a positive tone and as such one can see that the use of the term absolute is nothing but a clever trick devised by marketing departments in order to lull investors into a false sense of security. Absolute return funds are supposed to stand in contrast to relative return funds. The latter are dominating the institutional fund management space where portfolio managers strive simply to outperform their chosen indices on a relative basis. This can lead to the (absurd) situation that managers that simply lose less than their benchmark index are seen as successful and rewarded accordingly. Absolute return funds are supposed to prevent this from happening by aiming to make a positive return in all market situations. But investors should be aware that the emphasis is on the word 'aim'. There is no guarantee that that there will be any positive return at all. Even worse, given the lack of clear index benchmark it is well possible - maybe even likely - that absolute return funds will under perform compared to the main equity and bond indices when market conditions are favorable.

A Slap in the Face - Goldman's Facebook Farce

Don't get too excited when shown the next 'hot' IPO has always been the advice by Private Banking Advisory. Usually the insiders and their commissioned sales agents (aka 'Investment Banks') know more about the business than the great unwashed public (aka 'clients'). Now that potential US investors have learned that they will not be among the 'chosen few' who will be allowed to buy Facebook shares it just added another twist to the sorry tale of problems associated with the handling of Initial Public Offerings.. What may be another sign that the Web 2.0 hype has reached its zenith - or at the very least is close to it - becomes a showpiece of how not to treat your customers. What is also surprising are the fees that Goldman Sachs proposed to charge Facebook investors: It has been reported that Goldman would levy a 4 percent placement fee on clients, plus a half percent “expense reserve” fee. It would also charge a performance-related fee by requiring investors to surrender 5 percent of any profits, known as “carried interest,” according to a Goldman Sachs document. As usual, we could not find any indication about the willingness of the advisor to share in any losses the investors might make.

Do you know how a 'Mezzanine Certificate' functions?

We have to admit that even after 40 years working in the financial markets or with financial instruments we have only the haziest notion of how such an investment instrument is structured. So it is no wonder that a major financial institution is being sued by German investors who have been sold such a product. As always we advise investors to be vigilant and not buy investment products that they do not fully understand.

24 January 2011

Alphabet soup with 'certificates'

If anyone wants proof that the proliferation of investment 'certificates', warrants and other structured products has gone too far he only needs to look that Deutsche Bank's website for its x-markets products. I would hazard a guess and estimate that not even 5 per cent of all market professionals in stock exchange departments or investment management firms would be able to understand ALL listed products. Does anyone other than those involved in the manufacturing of these investment vehicles really master all the intricacies of their behaviour? We advise investors to be on the lookout and be vigilant in case their financial advisers try to put such structured investment products into their portfolios.

21 January 2011

Don't be hoodwinked by 'Celebrity Ambassadors'

News that former Grand Prix racing driver Niki Lauda has signed on as 'ambassador' for the Money Service Group is another example that investors are given the 'hard sell' by providers of money management services. Money Service Group has given itself an English name but is primarily active in Germany and Switzerland. One wonders what added value a racing driver brings to the party except that maybe some gullible potential or existing investors think that their fee money is well spent and that their investment performance (after deduction of fees of course) will benefit from his investment skills. After all, Lauda received 1.2 million Euro per year from Oerlikon, a previous sponsor who paid for him to wear its name on his head on all public appearances. Potential investors may have a look at the performance of 'Superfund' as Niki Lauda was previously lending his persona to this Hedge Fund provider. That even well-established large Investment Fund groups are not shy when using the popularity of sports personalities has been demonstrated by the use of other sports celebrities such as German football players that lend their image to Banks and Mutual Fund groups.

18 January 2011

How safe is your "safe" bond fund?

Not as safe as you may think, or as your financial adviser may promise you. As many investors are hankering for more regular income many bond funds are managed in a way that puts the emphasis on high yields at the cost of adding more risky holdings to the portfolio. And if you have thought that bond fund managers are willing or able to learn from such mistakes then you have another thing coming. What about selling short currencies, buying credit default swaps? On top of these higher-risk strategies investors are expected to pay higher fees - presumably on the pretext that these strategies will be more profitable. But if things go wrong - and they can and will - the only one left with higher - and even guaranteed profits - will be the fund manager while investors are left holding the bag.

15 January 2011

Are you left behind in the 'War for Talent'?

Press reports about an escalating 'war for talent' among providers of private banking services should alert investors to the fact that their best interests are not necessarily given priority by financial institutions and their employees. Financial advisers that are tempted to jump ship by ever-rising salaries, sign-on fees and other inducements will have to justify their increased compensation and will be promising the world to their clients in order to transfer their accounts to the new employer. Investors are strongly advised not to let feelings of personal sympathy influence their decisions about where to maintain their account and instead should focus on cold facts such as the stability of the institution they do business with, the performance of their investments (and more importantly: who is actually responsible for investment decisions) as well as the structure of costs and fees.

Why hedge fund performance is under pressure

Herding behavior by managers of hedge funds is just a special case of momentum investing. All market prices deviate from the 'real value' most of the time. The price discovery process at best is a process of approximation to value as new information is disseminated and digested by market participants. Technology and instant communication as well as low dealing costs and the enormous growth in pools of liquid capital exacerbate swings in the market - be they short-term (day trading, high-frequency trading) or longer term. The problem that hedge funds in particular face is that ultimately the only real returns that investments provide are either dividends or coupon payments. The rest of the profits from the investing game is redistributed wealth where one party wins what other market participants lose. This is particularly clear in the case of derivatives (futures, options, swaps etc). Profits from short selling are also always offset by losses on the part of long investors and redistributive by nature. As hedge funds concentrate on these type of redistributive trades they face a particularly strong headwind. The more crowded their space is, the tougher it is for them to create superior performance. This would have to be at the expense of other market participants. A fierce struggle between individual hedge funds to take a share of this diminishing cake can be likened to the fiery fight of a pack of wild animals for their share of prey.

Where is your money slipping into?

An article in Smart Money Magazine asks whether foreign exchange brokers are cheating their clients by using unfair trading practices when executing orders. This could be achieved by taking advantage of small price differences between the time when an order is accepted and when it is executed. The industry term for this is 'slippage' and denotes a practice that prevents a customer from getting a better price than the one promised to him when the order is taken. The difference is pocketed by the broker.
Investors can be deceived whenever they are not careful when monitoring the execution of buy or sell orders in shares, bonds or mutual funds and should take professional advice in order to protect themselves from being taken advantage of.

5 January 2011

Hedge Funds return 4.52 % in 2010

Given that low transparency and high fee structures present investors in hedge funds with an uphill struggle this performance is nothing to be proud of. A sometimes high risk profile makes it even more imperative that hedge funds offer a superior investment return to compensate for these drawbacks. Of course, there are exceptional performers, but there will always be some funds that - due to luck or skill - will perform better than the average. Even claims of actual past outperformance have to be taken with a (large) pinch of salt as research shows that a superior performance record can statistically be attributed to skill and not luck only on the basis of a performance history of at least 15 years. PBA advises to follow a well-balanced investment strategy that does not neglect cost and risk at the expense of sometimes elusive performance predictions.