Use of Derivatives by Investment Companies

As long as ICs comply with SEC regulations concerning asset coverage, there are no significant restrictions on their use of derivatives. However, an IC which uses derivatives more than just as a hedging strategy potentially faces the need to register with the CFTC as a CPO and may be required to comply with two different regulatory regimes.

Where an IC is registered with the SEC, its operator is not required to register with the CFTC as a CPO, if the IC enters into transactions in CFTC regulated derivatives for bona fide hedging purposes.

This exemption is dependent on the IC complying with the following conditions:

1. it commits no more than 5 per cent of its total net assets to initial margin and option premiums;

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Posted: February 9th, 2008 under Commodities Futures, Future Broker.
Comments: 4

Marketing Offshore Funds in Switzerland

Under the current law, a license to market shares in an offshore fund to the public in Switzerland can only be granted to a Swiss bank or a Swiss branch of a foreign bank, although not in respect of an offshore futures fund. Under the new law a license may be granted to any person, but only if an offshore futures fund is subject to home country control and its structure and investment policies are equivalent to those of Swiss funds.

Under the new law, offshore futures funds will be able to obtain a license to promote themselves in Switzerland whether they are contractual or corporate. They will be exempt from the requirement to redeem shares at any time.

A fund may avoid these requirements by marketing strictly on a private placement basis. In this case, no licences are required by the fund itself or the broking intermediary. However, a fairly restrictive stance on the number and type of investors that can be approached must be employed. The following criteria are applied: Read more »

Posted: February 8th, 2008 under Future Fund, Future Investing.
Comments: 2

Marketing Offshore Funds in Italy

To market offshore funds to the public, an application must be made to the Ministry of Treasury and the Ministry of Foreign Trade for authorisation. This will only be granted if these ministries are satisfied that the laws of the jurisdiction in which the offshore futures fund is incorporated are compatible with Italian law. The fund will have to open a representative office in Italy and will also have to either appoint an Italian bank or use a bank from another EC member state that has a branch in Italy that can act as custodian of its assets. Authorisation is deemed to have been granted if not refused within 60 days of the date on which the application was made to the Ministry of Foreign Trade.

1. banks and credit institutions;
2. insurance companies;
3. companies managing mutual funds;
4. stock exchange brokerage companies;
5. financial companies.

Subsequent to any placement, Consob must be notified of the names of purchasing investors, the type of fund and the amounts involved. Read more »

Posted: February 8th, 2008 under Future Fund, Future Investing, Futures Contracts.
Comments: none

Mitchell cites a series of examples to support his views:

1983 was a very difficult year for most traders. One trader had an outstanding year mainly because he sold soya beans short, right at the top of a big bull market. He made huge profits in the subsequent price decline. His 50 per cent year was the result, not of his skill per se, but of one event—having picked the top of a major bull market. He never repeated this first-class performance and subsequently faded away.

Favourable Market Selection

A trend-following trading advisor aggressively trades the 10 year Japanese bond. Our studies of this market show that for the last five years, it has been very easy to trade using trend-following techniques. Read more »

Posted: February 4th, 2008 under Futures Market, Managed Futures.
Comments: 3

In Belgium, the law of December 1990 regulated in an extensive way the status of investment funds (initially covered by the law of 1957) and created two new types of investment companies: the SICAV and the SICAF. The SICAV is the société d’investissement a capital variable, while the SICAF is the société d’investissement a capital fixe.

The income that the investor receives from an investment fund is regarded as interest income but where the investment fund provides details of the underlying income distributed (for example, dividend and interest separately), each of these elements can be taxed according to its specific nature. On the contrary, the income distributed by an investment company will be qualified as dividend income and not as interest income. Read more »

Posted: February 1st, 2008 under Future Fund, Managed Futures.
Comments: 5

Before the advent of managed futures funds in Europe, many European countries—but particularly the UK—suffered the attentions of unscrupulous and largely unregulated futures brokers. These unprofessional operators encouraged retail investors to open their own trading accounts, through which either the vicissitudes of the futures markets or the inflated nature of the brokers’ fees usually managed to ensure that the investors lost most of their money. Many of these unregulated practitioners arrived in Europe from the US, where the strict regulatory regime established by the Securities and Exchange Commission (SEC) or the CFTC had chased them out. The UK and continental Europe also managed to grow a few of their own cowboys.

Gradually, the introduction of a stronger regulatory regime across Europe and the growth of well-regulated managed futures funds — supported by their trade associations—have largely pushed the cowboys out of the forefront of the industry and out of existence, or into less well-regulated centres. Read more »

Posted: February 1st, 2008 under Future Broker, Future Fund, Future Investing, Futures Market, Managed Futures.
Comments: 2

This type of fee on a fund in Europe can be represented either in a bid/offer spread on the fund’s unit price, which means that the introductory commission is anything between 2 per cent and 8 per cent, or it can take the US mutual fund route and be charged at the back of the fund. If the money to cover this fee does not come out of the bid/offer spread, it is usually paid for out of the brokerage commission or management fees. Read more »

Posted: January 31st, 2008 under Future Broker, Future Investing, Future Management, Managed Futures.
Comments: 3

Industry observers claim that the total effect of fee structures is to transfer almost all risk to the investor. This claim needs stating because it is a condition attached to futures funds which investors are finding less and less tolerable. With retail products the guaranteed funds have attempted to resolve this problem in terms of investor perception of risk, but for large institutional investors who can hedge their own risk, these fees are too high a price to pay for exposure to leverage.

Funds which recently described themselves as “changing the relationship between risk and reward in favour of the investor” do so through more sophisticated risk control program—in reality of course, the investor still bears the burden of financial losses. Read more »

Posted: January 31st, 2008 under Future Fund, Managed Futures.
Comments: 2

These charges are usually quoted on a round turn basis, that is, representing the buy and sell process, and can vary significantly, from between US$ 15 and US$ 60 a round turn.

DEALING WITH THE FEES PROBLEM

Funds that are guaranteed carry more charges again, with a fee to the bank that is underwriting the guarantee, a fee for the zero coupon bonds or whichever high-grade security is being used for the guaranteed elements and so on. Clearly the institutional investor, for whom investing in futures is not the magical, mystical activity that it may be for the retail investor, is going to balk at paying these fees. Read more »

Posted: January 31st, 2008 under Managed Futures.
Comments: none

In 1992, it was easy to forget that managed futures do achieve above-average performance: the industry saw one of its worst years so far, with average performance for managed futures funds languishing at a loss of 7.90 per cent at the end of June. However, by September 1992, it was clear that generally June, July and August were good months, while the volatility of September’s markets - particularly with the currency crisis-had caused havoc with performance figures generally.

The year before, 1991, was not a lot better, languishing over the year with lacklustre performance and then finally and suddenly putting on a spurt of performance in December. By 1993, performance had improved somewhat, with average CTA performance to August 1993 showing an increase of 15 per cent over the year, according to TASS Management. The key reason for this somewhat erratic performance pattern is that most CTAs are trend-followersand recently the markets have not been forming trends, tending rather to drift.

The key point about performance in managed futures is that, in contrast to more traditional asset classes, performance can be achieved whether the underlying markets are going up or down. The clearest and most dramatic example of this is the period October/November 1987 when the world’s equity markets collapsed. During these two months, Credit Lyonnais Rouse’s Systemtrend fund achieved 14 per cent growth, and the managed futures industry’s average performance was 60.97 per cent.

Posted: January 29th, 2008 under Future Fund, Managed Futures.
Comments: 3