System Trading Blog

Make Your Money Work Harder

Archive for the ‘investment’ Category

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

leave a comment »

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

leave a comment »

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

Currensee: premium fee for basic service

leave a comment »

Image Currensee allows investors to mirror trade real trading accounts of traders. As a part of service, they do due diligence on traders before they approve them as eligible for investor accounts (and brand such traders as trade leaders). This is a big difference from other services like Collective2 and Zulutrade which are open to all traders. But then, the choise of which traders to select is up to the investor himself. Regulatory and corporate liability considerations should play a role here. They charge a hedge fund like fee of 2/20 fee (2% management fee and 20% incentive fee). Given the fact that investor selects the traders himself, this is a high fee for the service (additionally, Currensee receives rebates from broker).

Currensee pays the traders 15% of the profits they make for investors, but no share of management fee or broker rebates. This is a near-optimal arrangement as the investor interests are aligned with those of traders and there is no incentive for churning. And this is a one of the best deals out there for traders.

Currensee, now owned by retail forex company Oanda, is one of the safest ways to start copy trading, but it is heavy in terms of fees and for anybody with basic skills in trading algorithm evaluation it is more beneficial to look elsewhere. The reported average return of 11.94% p.a. (as on Sep 30, 2013), not adjusted for fees, is less than impressive for this type of investing.

Written by A.S.

October 29, 2013 at 10:29 pm

How long it takes to launch a new investment fund in EU

leave a comment »

It should be around 5-6 months, providing that the founders and managers are acceptable to the regulators. It takes about 1 month to prepare documents for the regulator and they’re likely to use most of the 6 month period  allowed to them for decision to approve or deny licence.

It took us about 18 months. But we started at the very grass roots level and there were a lot of issues to consider, not least how to ensure client confidenciality. Most of our clients are based in Europe and the legislation is likely to change so that it is very difficult to market offshore funds in Europe. So the choice was to register the fund in Europe. The next decision to be made was in which country. Traditional fund domiciles like Ireland and Luxembourg were considered initially alongside with Switzerland. All of those are the highest cost countries for fund registration. Switzerland has an disadvantage of being outside European Union.

Our final choice was Malta for a number of reasons. It is EU country, the regulator is efficient (something we felt is true after the first meeting with the regulator there), business language is English and the registration costs are a fraction of what they would be in Ireland or Luxembourg. Malta currently is still a small, but the fastest growing fund domicile in EU.

There were thousands of email exchanges with prospective service providers (custodians, administrator, auditor, brokers …) and legal counsel. In typical situation this would be more simple, but in this case the fund principals did want to double-check every single detail themselves and a lot of time and effort was spent on understanding how even the slightest detail in the whole setup works.

I’m happy how it worked out this time — no mistakes were made, no cost overruns and no major delays (some minor delays were mostly due to the fact that big institutions sometimes are slow with new things). I believe the next time for the same people it would take 4-6 months to launch a new fund.

Written by A.S.

October 2, 2012 at 12:01 am

The most important in system trading. A billion dollar issue to some.

leave a comment »

On balance, hedge funds lost money in Y2011. As some restructured and some changed their modus operandi, one qoute I find particularly interesting as it highlights probably the most important single issue in system trading:

Managing Director [of D.E. Shaw] Anoop Prasad credited the gains to a toughened attitude toward the firm’s models. “We understand that alpha decays,” Prasad said. “We are unsentimental about eliminating models that have decayed or died”.

That’s it. Identify/use performing trading systems and phase out non-performing ones. The  article is here.

Written by A.S.

January 1, 2012 at 10:42 am

Ensuring Financial Data Secrecy in EU with Professional Intermediary Letter

leave a comment »

The issue of data secrecy is a top priority for many investors. The usual reason is to hide the assets from tax in their home country. Some time ago I wrote about deteriorating Swiss performance when it comes to banking secrecy. However, Switzerland is still #1 on the Financial Secrecy Index as published by Tax Justice Network.

Generally, if you’re citizen in any EU country, exposing your financial data to any EU institution is highly risky. In EU there are a number of legislation initiatives, like Savings Tax Directive, which invariably will lead to automatic information exchange between EU member countries. Use of trusts is not practical as EU-based services providers, such as fund administrators, have the obligation to identify benefical owners. As well, legislation in some of the periphery countries may equate ownership through trust with direct ownership.

However, there is a way how to keep your financial data outside EU while investing in EU registered funds. This is done through Professional Intermediary Letter. The way it works is that your bank, say in Switzerland, writes such letter to a fund administrator in EU and bank invests on your behalf. The letter basically says that the bank is regulated in a reputable jurisdiction, is regulated and has performed all customer due diligince requirements. The end result is that the customer information remains confidetial in a jurisdiction outside EU while service provider in EU is allowed to rely on such bank to comply with anti money laundering prevention procedures.

Written by A.S.

October 6, 2011 at 11:30 pm

Malta as a Fund Domicile

leave a comment »

Visited Malta about two weeks ago to work on a fund setup and meet prospective service providers. Generally, the impression is very good. In terms of professionalism of lawyers, auditors, administrators etc. it looks and feels the same as in London. Particularly, Malta Financial Services Authority (MFSA) was represented by expierienced persons who acted in a highly professional and polite manner.

What one gets by registering in Malta, is a European Union domiciled fund. First, it means as little as possible restrictions when it comes to marketing in European Union. Second, potential investors consider EU, including Malta, as properly regulated and clean jurisdiction with little legal risks. Third, the fund is more acceptable counterparty for brokerage companies, banks, investees etc. if compared to funds registered in offshore jurisdictions.

Currently, there are  just a bit more than 400 funds registered in Malta, but the number is growing exponantially. As a fund domicile, Malta still looks tiny, if compared to Ireland or Luxembourg. I believe that the rapid growth of the Malta fund industry will accelerate. The reasons for choosing Malta are efficiency and costs.

Costs are a fraction of what you’d pay for similar setup in Ireland or Luxembourg, yet the fund structure you get are functionally the same.

Approximate setup costs are as follows:

1. Legal services: €9000-20000 (it should be noted that there is no regulatory requirement to engage local lawyer for the work).
2. Government fees: €6000.

Approximate annual costs:

1. Government fees: €2000.
2. Local director:  €6000.
3.  Company Secretary and Registered Office: €2500.
4. Audit fees: €8000.
5. Administration: up to 10 bp of assets, subject to minimum fee of at least €30000 per annum. It should be noted, that initially, the offers may be up to 25 bp for smaller funds.

Overall, setup budget of € 20 000 and annual budget of €50 000 should be be sufficient for  most fund structures. Our budget is closer to €15 000 for setup and €40 000 in running costs. However, for fund structuring purposes we choosed to use Bermuda registered investment advisor and it will add about €4000 to setup costs and €5000 to running costs.


Written by A.S.

September 30, 2011 at 10:25 am

Posted in investment

Tagged with , , ,