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It’s time to buy real assets with loan financing

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The picture is very clear. There is little choice for European Central Bank (ECB) as to print money and keep interest rates near zero. And it is what they are doing and will keep doing. So called “Draghi’s bazooka”. There are hard reasons for that and money printing is probably the least evil way to handle the situation. Full story here.

Draghi, ECB

Written by A.S.

March 15, 2015 at 10:05 pm

Posted in Uncategorized

How to set up an investment fund in EU

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The post is published here.

Written by A.S.

March 8, 2015 at 1:13 am

EU law cuts off retail investors from the best investment opportunities

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If Soros or some other big investor has a clear idea on how to profit from buying, say, farmland in South America, he probably buys a chunk of land on his own account, then makes a fund to take on other big investors and, they play it out in profit from it in various degrees. The initiator of the idea profits both from allocation of proprietary capital and management of capital of other investors who are satisfied enough to have somebody to manage their investment properly.

However, for retail investors there is no way to profit. And for investment managers there is no legal way to offer such investment opportunity to retail investors. There is just no way to make an investment fund, eligible to retail investors, for strategies like described above. Such strategy falls under broadly defined alternative investment strategy. EU Directive 2011/61/EU (and its trasposing into national laws) allow retail funds to invest, effectively, only in listed securities, government bonds and bank deposits and money market instruments. Needless to say that those are investments with the most terrible risk metrics – from negative interest rates on government bond issues to casino like behaviour of the stock market in general.

Alternative investment strategies may be accommodated in specialized investment funds targeted to professional investors, but it is illegal to offer such funds to retail investors. Minimum investment should from €50k to €125k, depending on where the fund is domiciled. To achieve reasonable diversification, investor must have at least €1-2m to participate in more advanced, more rational and presumably more profitable investment opportunities. The average working person with €50k or less to invest just have no chance. He has available products from mainstream banks with ridiculously low at best or negative investment returns with some considerably profitable ones (needless to say, profitable by chance rather than virtue). Many countries, like Spain, does not even have legislation for specialized investment funds, just retail.

Written by A.S.

March 6, 2015 at 10:47 pm

Marketing restrictions for investment funds in EU and how to overcome those

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Investment ideas are rather scarce. Many small and medium size investors sit on lots of cash with little idea how to deploy it productively. It may be in bank deposits, in a number of banks so to benefit for deposit insurance scheme, if any of the bank go down. Bank deposits? Yes, earning nothing. Some of the cash is spilled occasionally, by investing in another vacation house (usually sold at the top of price range – usually a fact well known to the buyer, yet blissfully ignored).

New specialized funds with fresh investment strategies should be welcome in this environment, but needless to say that they are not. If someone has a strategy to offer to investors, he or she has to face a tough regulations. Even if you want to talk to the most advanced investors and asking for minimum investment starting at €125k.

In 2011 EU has issued Directive 2011/61/EU on Alternative Investment Fund Managers. The Directive, effectively, disallows marketing of any funds unless such fund has a fund management company licensed in EU. Funds with AUM under €100 million may opt out and be exempt of certain regulations as set out in the Directive. However, if it does so, such fund must be marketed under private placement rules which are left to national governments to be set.  Private placement rules in the biggest markets – France, Germany and UK — are prohibitively strict. In practice it means, if one registers a fund in Luxembourg or Malta, and chooses to opt out of the regulations set out in the Directive, such fund may be marketed under private placement rules in its country of registration. In other words, for a Luxembourg fund you invite potential investors, all of whom should be professional investors, to Luxembourg for marketing presentation. If you cross the nearby border into bordering France for an investor presentation, you break the law. In addition, the private placement rules are expected to be reviewed in 2018 and a new EU regulation may be on the way.

On the other hand, if one chooses to comply with the requirements as set forth in the Directive and as implemented in national laws of the member countries, such fund has EU “passporting rights”. By following a simple notification procedure, the fund can be marketed in all the EU. For example, if your fund has a licence in Luxembourg, you state to the regulator in Luxembourg that you want to market in Spain and Luxembourg regulator notifies the Spanish regulator and the fund is ready to be marketed to eligible investors in Spain.

Barcelona: impressions revisited

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Barcelona, the host city of the World Mobile Congress taking place from 2-5 March, 2015.

Disclosure: I’ve never liked the city before. Difficult to drive in pre-navigator era, pickpockets, and little else as just a big city.

Nevertheless, a business project brought me here.In somewhat inopportune moment when the the congress takes place. 90.000 persons come to the city for the congress. My neat hotel raised prices an exact 2.3 times for the exact days of the congress and back to regular price just as from evening of the day the congress ends. And I have nothing more to do with “mobile” than any other everyday person.

Well, I should not complain too much. This time I somewhat even enjoy the city. Reminds me of London. Spanish-speaking London. Ok, Catalan-speaking!? Not really. 80-90 per cent of time the language I hear is the language I understand. And I understand Spanish, but not Catalan [at least, not yet]. And, yes, Catalans are 100 per cent bilingual. Actually, more than that – my feeling is that most Catalans have some functional level of English as well – a big difference from the rest of Spain.

What are the impressions? What instantly comes to mind are episodes like a man in suit and tie going on “motto” with a backpack. Motto is a scooter. And, of course, the scent of the city. What is the scent of Barcelona? Marijuana, what else. One call smell it almost everywhere. The pollution from cars in the city is not that high. You can breath most of the time. Its a privilege, not in every big city one can breathe.

What else? A lot the cafés run by Chinese. The only ones open at night. Often stinky, but surprisingly not ignored by locals. Think about movie Biutiful, the movie with Javier Bardem. No proof that reality is any better than the movie. Take a jarra, i.e. a pint of beer, in a bar. Then check Wikipedia for “hepatitis C” — is it true one can contract “C” from dirtiness.

But this is very subjective. I have a friend here. Drives €150k+ car, lives in an apartment with nice sea view, goes snowboarding to Andorra every second weekend, speaks almost no Spanish or Catalan. His perspective is probably very different from mine. Or may this is the way to go. In Barcelona, or elsewhere … Well, lived like this before in a different climate zone, it brings you down, although may be not in Barcelona … Barcelona is still a part of Spain where the average life expectancy is 82 years (ok, 79 yrs for men). And Spain has always impressed as it seems to be the only country in the world where it looks like everybody drinks and smokes all the time and, nevertheless, lives longer than almost in any other country in the world.

Written by A.S.

March 5, 2015 at 12:08 am

Posted in Uncategorized

Retail Brokers May Take Away 10% of Account Equity Every Month

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The two most overlooked parameters when choosing a fx broker are rollover and foreign exchange costs. Many are not even aware of them, even if such costs may be equal 2-3 or even 10% of account equity per month.

Usually a potential client looks at spreads, user interface and technology to choose an account. There are other things to consider and those are so important that can easily be a deal-breaker.

Rollover cost is one of such. And such rollover cost may not be obvious until one starts to trade. You receive interest for long currency positions in your account and pay interest for short currency positions. Say, if interest rate for Australian dollar is 5%, you should collect this interest on you long positions and pay interest at the same rate for short positions. In practice, those rates are set by the broker and, in a typical case, you are likely to receive 3% and pay 7% rather than 5% both ways. It is systematic to abuse interest rate setting and a real life example is that clients pay as high as 30% rollover cost. In other words – if you have a short position over a 12 month period and the currency duly declines 30%, you make nothing, just because your profit is taken away as rollover cost, if taxed at rate of 30% p.a.

Another issue is foreign exchange cost (for any type brokerage account, not only FX). If there is a clause in the account agreement that all P/L is converted to account base currency at the end of the day, all you P/L balance in foreign currency will be converted to base currency at close of business day at bid price and bought back at ask price at the beginning of the next business day. Such bid-ask spread may be as wide as 0.5% and your P/L will be continuously taxed at this rate daily. Say, if the account base currency is EUR, but half of the account equity consist of profits denominated in GBP – half of the account equity will be taxed through currency conversions – even if no trades are placed in the account, account equity can decline by as much as 8-9% per month as a result of foreign exchange cost as imposed by brokers.

Those are very unfavorable odds to trade against – as much as 10-11% of account equity per month may accrue as imposed transaction costs. Thread carefully and better avoid retail brokers.

Written by A.S.

July 16, 2014 at 9:50 am

Good Governance is the Key to Prosperity

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imageThere is an excellent piece of work Great Companies, Great Nations by Richard Chandler of Chandler Group on governance issues. Available as free download.

Good governance, both on company and country level, goes hand in hand with prosperity. The book supports the message with plenty of stats.

I highly suggest this as a weekend read or before you decide on a major investment.

On the odd side, out of Top 5 the most corrupted countries listed (page 6), Russia is by far the most prosperous. On the corruption perception index Russia is marginally worse than Vietnam, Mozambique and India while with $18408 GDP per capita it is about 12 times more prosperous than India ($1540), 28 times more than Mozambique ($650) and 10 times more wealthy if compared to Vietnam ($1896).

Written by A.S.

July 5, 2014 at 8:45 am