24 October 2009

Investors must not be too trusting

The news that the hedge fund manager John Meritwether is launching his third fund after having produced disastrous results with his first two funds has caused quite a stir. He may only be a good salesman but there still have to be some willing investors. But I suspect that not many REAL investors will sign up for Meriwethers's new fund, - it will be mostly 'advisers' who will put their 'clients' into the fund or their fund of funds. These intermediaries do not risk their own money but pocket juicy fees and real end investors should take care to take independent advice on the suitability of investments rather than be too trusting.

20 October 2009

Runaway financier called Beano disappears

Another warning about investors relying too much on word-of-mouth and personality when making a decision to entrust their money to a financial advisor.

19 October 2009

EU wants automatic exchange of Tax information

The EU develops more and more into a bureaucratic and undemocratic monster. The latest news is the 'demand' for an automatic exchange of tax information about foreign bank customers between member states. The EU was originally declared to be an economic union but the main instigators behind the 'project' always intended this stated purpose to be the Trojan horse that would allow their statist fantasies to be imposed piecemeal on an unsuspecting population. Napoleon and Hitler certainly would have been well-advised to try this approach rather than go the route of military conquest.
The raison d'etre of a state is that the citizens of that state enjoy full sovereignty over their affairs. Delegating powers to a foreign authority - especially one that they have no control over - is a grave violation of that principle. In the case of taxes there is no reason to inform any foreign government in any way. The whole purpose of putting money into another country is to remove it from the sticky fingers of the home government. The host country than in turn can tax the affected funds in any way it wishes. In the interest of tax harmony it should not favor foreign investors in any way and give them different terms than those offered to home country investors.
The home country of the funds concerned has in turn full authority to tax the money as long as it is in the country. If it so wishes it can create an 'Iron Curtain' and prevent money from leaving the country.
Just imagine what 'full information' would have meant in past periods: would the Dutch have 'informed' the corrupt French regime of Louis XIV about the investments that prudent French citizens had made in Amsterdam, or should the French government of the 1920s have informed the thuggish Communist government of the USSR?
Europe prospered BECAUSE there was no uniformity of government and religion had finally given way to a civil regime after centuries of struggle. How much longer can the control freaks in Brussels be allowed to destroy the fruits of these battles?

13 October 2009

Can you eat absolute returns?

We recently stumbled across this interesting quote: 'You can eat absolute return; you can't eat relative return'. This was meant to mean that an investor should invest in funds that target an absolute (hopefully positive!) return rather than a fund that tries to outperform an index but ends up losing money at the same time. The problem is only that a fund manager may aim for a positive absolute return, - but what happens if he still manages to lose money? The investor gets no guarantee that there will not be any loss. So-called guaranteed funds offer this promise - but at a relatively steep cost (and they are only as safe as the bank/fund manager offering this guarantee).

Beware of higher fees

An interesting quote from an article in the Financial Times (October 5, 2009) illustrates the need for investors to be vigilant and prevent high management fees from pulling down their investment returns:
'...the wholesale shift (to into niche asset classes) is raising fears that investors are being clobbered with far higher fees, lining the pockets of the industry but potentially sharply reducing investment returns'.

28 September 2009

Pitfalls of investing in the United States

News that the Madoff Trustee Picard may sue investors that have extracted positive returns from Bernie Madoff's Fund before the fund collapsed should be a warning sign for international investors. Whatever the merits of Picard's case against former investors - to subject yourself to such legal uncertainty is the last thing an investor would want to do. Just as no one in his right mind would cross a bridge where a warning sign reads: 'Warning - cross at your peril, there is a 1 in 1000 chance that the bridge will collapse while you cross it' so any sane investor should think twice before handing his savings to an investment manager based in the United States.

24 September 2009

The Vanishing Hedge Fund

Or should it better be: the vanishing investor money? Forbes Magazine carries a story that underlines the danger of entrusting money to loosely-controlled investment managers without doing proper due diligence.

14 August 2009

Hedge Fund Managers gaming performance yardsticks

The improved markets have also put some wind into the sails of the hedge fund industry. Some high-profile managers that crashed out during the market turbulence of the past two years and closed their funds are trying to launch new funds. This activity needs to be carefully monitored as it is possible that the managers want to get around the problem posed by so-called 'high water marks' in their old funds. They would have prevented managers to charge performance fees until the fund values reach their previous high point.

Reverse Convertibles - do you really understand the maths?

An article in today's Wall Street Journal (16 June 2009) points out the dangers of this form of bond. The investor gets a seemingly very attractive coupon but most investors are not aware that the high coupon payment is the result of an embedded put option that the investor sells.
Most retail investors - and we would include so-called 'High Networth Individuals' - are unlikely to understand the detailed workings of options, let alone the possible pitfalls of selling a naked option.
Investors are easily persuaded to go for these 'free lunches' and take the high current income which is dangled in front of them by eager salesmen of financial 'advisors'. But the danger that is in most cases only mentioned in the small print and glossed over during the sale process is the fact that the investor may end up with the underlying shares of the issuing entity if they have declined by a specified amount by maturity.
These shares are likely to be worth considerably less than the stated principal of the convertible bond and their value will on average be 20 - 30% below nominal value of the bond depending on the terms of the bond issue.

16 June 2009

The Wealthy lose faith in their bankers

Just under half of all wealthy people are set to change their private banking arrangements, as the impact of the credit crisis forces a rethink on the industry (Wealth Bulletin, 16 June 2009)

9 June 2009

Fixed Interest Securities in Age of big Government

Fixed Income Securities promise what their name says: with some exceptions they pay a fixed amount of interest every so often and promise to repay the principal at maturity. Some classes of bonds pay interest on a floating basis, give the right to convert the principal value into shares or link the interest payment to an index of inflation.
Usually the investor has the prospect of a limited return but unlimited potential of loss (if the debtor goes out of business for example).
Investing in Bonds must therefore approached with extra care and the quality of the underlying debtor must be carefully assessed.
Sometimes, however, it is possible to make significant capital gains as well. This is the case when the investor is able to benefit from a sustained move in the level of interest rates or a major change in how the market views the quality of the underlying credit.
Recently an extra risk has entered the equation. We are speaking of political risk. It is a worrying development that the US government has begun to override the legitimate interests of the debt investors in Chrysler and General Motors bonds. We will watch the impact of these interventions as they may well lead to an even more cautious approach to investing in bonds.

30 April 2009

Investment Funds no easy solution

Quite often investors realise the futility of trying to pick stocks and time their entry points. In that situation investment advisors tend to suggest that investors move their money into the supposedly simpler investment instrument of investment funds. But that this is no real solution is demonstrated by the fact that there is a confusing variety of such collective investment vehicles - in fact, the Financial Times for example lists more investment funds than individual shares!

10 March 2009

Perspective on Banking Secrecy

During the recent past politicians and lobbies of all persuasions seen to have found a new 'Enemy Number One' - Banking Secrecy and linked to this Tax Havens large and small.
Politicians and their paid servants the regulators have failed miserably to prepare for the current global financial crisis. Despite the fact that institutions like the Bank of International Settlements has spent roughly 10 years and produced a report of 1000 pages the Bale 2 rules did nothing to prevent the debacle that has afflicted major banks around the world.
So it appears to be nothing more than a desperate search for scapegoats when politicians attack banking secrecy and tax havens. They are not the cause of the current crisis!
Not so long ago there was a time when anyone could walk into a Bank in Austria and open a bank account without presenting any form of documentation. No one asked what their name or address was. You paid in your money and you received a bearer passbook that was the only document you needed to claim back your money. In his teenage years the author even opened a number of passbooks on the same day. That way he pocketed a small amount of money that the banks put into new passbooks as a reward for opening the account.
Was crime any higher as a consequence of lax banking regulation? Was corruption rampant? Not at all. Since the (US inspired) crusade against banking secrecy gathered speed both crime and corruption have - if anything - increased. The world certainly does not seem to be a safer place.
Ironically, much crime and corruption can be traced back to ill-conceived legislation: the war on drugs, arbitrary taxes (tobacco, alcohol), questionable regulations and subsidies (agriculture, trade tariffs), limits on prostitution. All these laws and regulations may be well-intentioned but they provide a fertile field for criminal activity and usually are counterproductive as well as costly to the taxpayer and citizen (who most of the time get no say on respective laws.
If countries want to close down tax loopholes they can avail themselves of a solution that is easy to administer and leaves the precious privacy of all citizens untouched: Legislators can decide to impose taxes at source. If politicians are really only interested in reducing the amount of tax that in unpaid this solution should be suffice. Anything more intrusive indicates that the authorities are really interested in invading the private sphere of the individual and increase the control that the state already has over the citizen's lives.

9 March 2009

Euroland a Zone of Instability?

In July 2005 we penned a warning about the Euro. The past few months have demonstrated that the new currency is not the solution to the Old Continent's economic problems. In fact, it is a potential risk to the stability of the Eurozone. While the risk of sudden shifts in currency values is (for the moment) off the table the economic imbalances express themselves in the credit markets as the markets try to evaluate which country may eventually have to default on its debt.

7 March 2009

Guaranteed Products - but by whom and under what conditions?

Investment Solutions that offer the Investor a guarantee for the return of part or all of its investment appear to many Investors to be the Holy Grail of Investing.
One of the fundamental tenets of Portfolio Theory is the relationship between risk and return. The higher the expected return the more risk has to be assumed by the Investor.
As we all would like to have something for nothing - or at least as little as possible - the vendors of Guaranteed Investment Products dangle a very tempting solution to this investment conundrum.
These investments are also promoted under the name of 'Structured Investments' and usually contain an array of derivatives - options in particular - that even investment professionals may find difficult to understand.
In addition, there is also substantial counterparty risk associated with the investment package and as the Credit Crunch has demonstrated the investment and banking professionals were found to be less than capable of correctly assessing the credit worthiness of even the most prominent financial service providers.

21 February 2009

Madoff - could he have done it alone?

What is the similarity between the Fritzl case in Austria and the Madoff scam? In both cases it is extremely unlikely that those close to the perpetrator were ignorant of what was going on around them.

Madoff Investors thrown to the wolves

The speed with which Banco Santander has decided to compensate the customers of its Optimal Hedge Fund of Fund Division for losses they incurred due to the unit's exposure to the Madoff Ponzi scheme may appear to be commendable.
The substance of the compensation scheme has been sufficiently reviewed in an article in Barron's Magazine and we do not have sufficient detailed knowledge to comment any more.
But it seems strange that the regulators seem to be well behind the curve as we did not yet notice any activity of the Spanish or Swiss regulators. They should be the first to bring down the book on Santander and Optimal as the companies conducted the business out of their jurisdiction.
Maybe we just missed something and therefore we would appreciate if any reader would point us in the right direction.
But at this stage it appears that despite all the talk about regulation and the well paid bureaucrats sitting in the cushy offices of the regulatory organisations the investors are out on their own or are thrown to the wolves after their investments have gone up in smoke.

19 February 2009

Financial Conglomerates

"Diversified financial conglomerates are a bad idea for customers because they are riddled with conflicts of interest" (John Kay, Financial Times, 11 Feb 2009).
Now this statement may appear to be very convincing in light of the disasters that have befallen financial behemoths such as UBS, Citigroup or Merrill Lynch during the past twelve months.
But things are not as simple as that. While the age of the financial supermarket as a business strategy may be over this does not mean that focused financial service providers are necessarily free of any conflict of interest.
Investors have to judge each institution they deal with on its own merits and conduct proper due diligence before parting with their assets.