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9/11 & 13/9 "new paradigm"? Technical questions

Hi doom & gloom people:D

You have convinced me that we are living in a new financial world.
To survive we have to understand the logic of our new environment and change our behaviour.

So here are some technicalities, whose mechanism I don't "know".
"Of which I have no cognition" as a judge once said.
I think this means you can know something like a parrot knows it will get fed if it says "Pretty Polly" but it does not understand the full implications of its actions.
=========================================================
"Shorting" - why cannot mutual funds do this, when it was obvious to ignorant me that "financial services", "house building" and "estate agency" were all candidates for shorting?
Hargreaves Lansdown continually write to me, as I invested a nest egg in a Building Society via them once upon a time. I think their strength is marketing rather than investing;).
The flavour of the month newsletter for July is titled "Wealth Preservation" so they agree with me on that one:T (blind leading the blind?). However to keep their staff employed, they need to keep selling something:
- How about putting more than 10K with us and you can invest the surplus at 6+% (gross) with (H)BOS. for a 6 or 12 month fixed term.(can do something similar myself with 100% of my wad)
- How about corporate bonds (I've got some Euro ones already)
- What about oil (Unless we have (another) war, I think the current price will drift sideways if not down in GBP terms).
- Dare we say gold (Ditto).
- Food (Ditto and a lot of politics, protection and substitution involved eg spuds v sugar v rice).
- Let's go shorting: "Mark Lyttleton (Black Rock) is leader of the pack at running absolute return funds".(However young Mark gets to skim off the usual 1.5% with a total expense ration of 2.55% and "20% on out performance of 3 month LIBOR" - presumably this translates as "20% of every thing extra I've got you, over what you would have got had you put the cash into a LIBOR tracking fund". The investor takes his gains as subject to CGT (might be useful, were I in the age allowance trap).
BUT what is the tax within the fund?

He is modestly winning at the moment but will he know when to stop and flip over to gearing & going long?

Sounds a bit "heads I win, tails you lose"?


=======================================================

A couple of days ago, I was struggling to ingest caffeine and still 1/2 asleep. Justine Stewart - Radio 4's favourite money man was talking about banks and started talking about what sounded like "Deaf-Con-4".
What was he talking about?

========================================================

Finally, I get a regular email, encouraging me to rent "charting" software to tell me what is really going on. When I was 21 I tried to track my first 4 investments with a huge sheet of graph paper stuck on the rear of the headboard, "Fork 'andles" anyone?
I really don't have the time or interest to marvel over "double bottoms" etc. but the free promotional videos are here:

http://uk.youtube.com/watch?v=y0wUrfXGSbY
Harry.

Comments

  • Conrad
    Conrad Posts: 33,137 Forumite
    10,000 Posts Combo Breaker
    And.......................
  • Generali
    Generali Posts: 36,411 Forumite
    10,000 Posts Combo Breaker
    The reason that most funds aren't allowed to short is that whereas the losses to a long position are finite as a share can't be worth < 0 the losses from a short are theoretically infinite.

    Let's say you buy 100 shares in E Z Loanz Banking Inc at £1 each. The next day they go bust so your investment has fallen in value from £100 to £0 = loss of £100.

    Instead let's say you short 100 shares in Rubbish Big Pharma Inc at £1/share. The next day they realise that the verruca cure they've been promoting makes all men as good looking and well thought of as Generali. The shares soar to £1,000,000 each. At that point you've made a loss of £99,999,900. Ouch.

    Of course in practice, no man can be as good looking as Il Generali so that scenario will never happen but you can see how losses could be spectacular from a misjudged short.

    Of course pretty much anyone can short sell shares on 5% margin (like a deposit on the value of the shares) using a product called a CFD or contract for difference.
  • Generali
    Generali Posts: 36,411 Forumite
    10,000 Posts Combo Breaker
    PS the fund they're trying to sell you an investment is a hedge fund.

    The structure is known as 2&20 which means that you pay a management fee of 2% of your investment pa plus 20% of the profits they make over and above the benchmark as you rightly thought.

    The fund is almost certainly based offshore, probably in the Caymans. You should pay tax on any investment gains from offshore or onshore in the same way that you pay the rest of your tax subject to complex things like double taxation treaties.

    Of course, it's very difficult for the taxman to know what is happening to your money in offshore investments. A more cynical man than I might say that's the whole point.
  • turbobob
    turbobob Posts: 1,500 Forumite
    Mark Lyttleton manages the Blackrock UK Absolute Alpha fund which is a UK unit trust. I assume the OP is referring to this, as Hargreaves Lansdown heavily feature this fund? It uses CFD's both to take short positions on shares which the manager thinks will fall and as part of its hedging strategies (pair trades, which combine long and short positions to reduce risk). Theres a bit more info in the brochure.. http://www.blackrock.co.uk/IndividualInvestors/Literature/LiteratureFinderResults/EMEA02013459

    Worth noting its lost in the past month but not nearly as much as long only equity funds.
  • harryhound
    harryhound Posts: 2,662 Forumite
    Looks like I should "bone up" on CFD's.

    I wonder who was wrong footed by A&L last week?
  • Generali
    Generali Posts: 36,411 Forumite
    10,000 Posts Combo Breaker
    Plenty.

    I heard someone ask if there was a problem with the pricing that day!

    CFDs sound complex but are quite simple.

    Let's say a share is worth £2 and you want to buy a CFD representing that share. In simple terms, if the share goes up to £2.20 you've made 20p. If the share goes down to £1.50 you've lost 50p.

    One advantage of trading CFDs is that you don't have to find the full value as you trade on margin, usually 5%. In the above example then you only have to find 10p (5% of £2) to set up the CFD. Of course using leverage like this means that your losses and gains are both amplified.

    Be warned, CFDs can be very damaging to your financial health. I am not advising or encouraging anyone to invest in them, merely explaining them. If you decide to go for it then examine margin calls and the like and be warned that if you get a margin call when you're on holiday or otherwise unavailable you will almost certainly find that your position has been partly or entirely closed and you will have to bear the loss in total with no recourse to ombudsmen or any of those other good guys.
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