Archive for the ‘Money’ Category

SFO: Not So Pusillanimous?

The Serious Fraud Office has (for the first time ever) had a change of heart and reopened its investigation into the Weavering Capital hedge fund fraud. This comes after a private court case against the odious Peterson and his band of thieving and/or incompetent allies in crime was concluded. The judge in her high court ruling shed a little light on what actually happened at Weavering:

The hedge fund was launched in 2003. Within less than three weeks it had lost almost 20% of its value. The following month Peterson entered into two OTC option transactions with another fund based in the Virgin Islands which he controlled, and backdated them to the previous month so that the fund appeared to have gained in value during the first month of trading. In other words, right from the outset Peterson chose to defraud investors.

During 2004 Peterson used the same deceit 13 times to cover monthly losses.

From 2005 switched to using swaps, rather than options, but basically continued the same fraud.

In 2009 the fund contained:

  • some worthless bonds
  • $40 million (net) options positions
  • $600 million swaps with Peterson’s company

This portfolio doesn’t really match the fund’s original prospectus which claimed the fund:

  • would construct a portfolio so as “to ensure a balanced and diversified risk profile”.
  • would maintain a “rigorous” and “pro-active” approach to risk management “[i]n order to meet its commitment to capital appreciation”.
  • would endeavour to adhere to investment restrictions, such that “no more than 20% of the value of the Gross Assets of the Company…is exposed to the creditworthiness or solvency of any one counterparty”.
  • adhered to the principle of diversification in the use of derivatives.

Lies, all lies. And there were more lies:

“The majority of the securities we trade are exchange traded, therefore valuation is very simple – LIFFE valuations are taken…”,

“There is currently one fund managed by the firm”,

“Portfolio concentration in terms of amount of instruments and exposure bias…: All positions are expressed through futures and options. N/A”,

“List the instrument types you use by percentage: Options: 75%/Futures: 25%”,

“We could liquidate our portfolio within 1 day; due to our option protection we would protect the overall portfolio within the predefined max loss limits [predefined as 5%]”,

“As all our investments are exchange traded we never have any pricing discrepancies”,

“Please describe any current or potential conflict of interest, any relationships which may affect trading, trading flexibility, e.g. associated broker/dealer: N/A”,

“Are investors informed when minor/major changes are made to the trading, money management, or risk control methods? Yes.”

The judge described Peterson as “… not at all arrogant in manner but his whole attitude to investment was an arrogant one.” With this arrogance he didn’t try to conceal that the transactions were with a related company which also had “Weavering” in its name. He also chose very reputable companies to audit his work. He also didn’t profit from the fraud; he didn’t take any money out of the Virgin Island company. The judge concluded “[the fraud] … been committed out of a sense of invincibility, self-belief, and a gambler’s mentality.”

There’s a lot more detail in the judge’s judgment at:

http://www.bailii.org/ew/cases/EWHC/Ch/2012/1480.html

As for the SFO, do I now consider them to be any less pusillanimous cowards? Absolutely not. I (and others) firmly believe that the only reason they’ve reopened their investigation is that if they hadn’t they’d have been taken to court by the administrators.

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SFO: Pusillanimous Cowards

In September last year the Serious Fraud Office decided to abandon its two year investigation into Weavering Capital for perpetrating what was Britain’s largest hedge fund fraud to date. Apparently the lily-livered milksops at the SFO found it too difficult to to get the evidence they needed. Boo-hoo for them. That’s their job. How hard can it be to prove that the Weaving marketing information bore absolutely no relationship to what was actually done: interest rate swaps between the fund and an offshore company controlled by the fund manager, Magnus Peterson?

Anyway, just days after the SFO’s lazy, bungling incompetents decided the case was too difficult for them, two directors of Weavering (one of them Peterson’s father) were each fined $111,000,000 for “wilful neglect or default in the discharge of their duties” by the Grand Court of the Caymans.

And earlier this week the High Court in London ruled that the directors of Weavering, including Peterson and his wife, must pay $450,000,000 for their fraud in a civil case brought by the company’s liquidators.

And how did the Weasel of Weavering take the news? Was he humbled or apologetic? No. He said:

“The judgment is simply wrong”

and continued

“[it] shows a very limited understanding of the financial and trading aspects of the management of the fund”

How difficult is it to understand that a cheating scumbag comprehensively lied to investors, auditors, brokers and administrators about the fund’s strategies and investments, entered into sham transactions with himself, and ultimately burnt his way through more than $530,000,000 of other people’s money?

Of course, all Peterson has to do now is declare himself bankrupt and he gets off scot-free. Investors will never see any of their money back.

This is not justice. If there were true justice in the world Peterson would be behind bars now sharing a cell with a big, fat, sweaty man who rogered him nightly to within an inch of his life, and then his bum hole would, Prometheus-like, be restored by the next day so that the whole process could be repeated. But then, with the weak-kneed, craven, chicken-hearted cowards of the SFO at the helm, there never was going to be any justice in this case at all.

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Diversification Dangers

One of the things you learn in Investing 101 is the importance of diversification – in short, don’t put all your eggs in one basket. The thinking is that different asset classes tend to respond differently to changing economic circumstances. That’s why most portfolios contain a mixture of bonds and equities, the (somewhat wishful) thinking being that went equities go up bonds will go down. Larger portfolios will usually have some investment in commercial property. Here it’s usually considered better to invest in funds which directly invest in physical bricks and mortar than funds which invest in property companies since the latter are more closely correlated with the broader stockmarket.

With an even larger portfolio it’s pretty common to add hedge funds, private equity and commodities. Some people also add things such as forestry since they believe money can grown on trees. All this is done to increase diversification and (notionally) to decrease risk. That’s the theory.

In practice, I’ve been pretty badly burnt.

My hedge fund investment was badly hit by the Weavering Capital fraud.

One of my private equity investments, an Arch Cru fund, was spectacularly mismarketed and mismanaged.

With both of these it’s going to take several years before I get what is only a part of my investment back.

My venture into commercial property with Carpathian at one point was down 90%, and the fund is now gradually being wound up as the shopping centres and office blocks it owns are sold off.

And now I’ve been stung again: Castlestone Management, in two of whose commodity funds I have money invested was raided by the FSA and there followed a temporary suspension of trading the funds. As soon as the suspension was lifted I gave instructions to sell out of both these funds. I waited and waited but didn’t receive the proceeds. Yesterday Castlestone announced they were closing the business and that the funds would be frozen: no shares issued or sold. Goodness knows when I’ll see the money, and how much of my original investment I’ll get back.

Precisely how many times can lightening strike in the same place?

Forget diversification – I’ll be keeping my money under the mattress from now on.

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FSA & SFO

Earlier this week it was announced that investors in the Arch Cru funds were to receive compensation for their losses: they’ll eventually get 70% of their money back. Apparently the Fundamentally Supine Authority has OK’d this. What the FSA has blatantly failed to do is point out what went wrong and who was culpable. The most likely explanation appears to be that the funds’ assets were misvalued, either through incompetence or corruption. The fact that there is any compensation being offered certainly suggests that something pretty serious went wrong. Who was the guilty party? What was Capita’s role in all of this? Why is the FSA (reportedly) dismissing complaints against Capita, refusing to investigate them without even considering their merits? And why has it taken the FSA two years to get to this point?

70% eventually back is better than nothing (though this will take several more years to achieve). However, for the widows and orphans who put their entire life savings into the Arch Cru funds because the funds were described as “low-to-medium risk” and classified as “Cautious Managed” by the IMA this is hardly a satisfactory situation. Furthermore, why did Capita allow the funds to acquire assets which clearly did not meet the “Cautious Managed” criteria?

It certainly seems that investors are being paid off to keep quiet so that the guilty party or parties escape without sanction.

***

The SFO has been even more lacklustre in its prosecution of the Weavering Capital Hedge Fund fraud. This was a clear cut case of a hedge fund manager lying about the the nature of the fund’s investments. (The fund’s only transactions were interest rate swaps with a company owned by the fund manager’s father.) This fund went belly-up in March 2009. Since then the apparent lack of progress has been staggering. Equally staggering is the lack of information coming from the SFO. A couple of men were arrested and immediately released in 2009 – and that’s it. By this stage I’d have expected the guilty parties to be behind bars. And to date investors have yet to get back a single penny of the money they entrusted to Weavering. Perhaps they never will.

***

What both these cases make abundantly clear is that financial regulation in the City of London just isn’t working.

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Banking

In Britain I thought of banking as pretty much a commodity; there was little to choose between the high street banks. When I worked in Japan a few years ago I was surprised to encounter cash machines which could receive deposits, handled coins as well as notes, and allowed one to pay one’s bills. Ah, the wily Japanese.

My first impression of banking in Thailand was that it was primitive. Most accounts are passbook based and there are no monthly statements. Few people have chequebooks. And for foreigners debit and credit cards are very difficult to obtain. Even then, banks often demand a deposit of 100% or 200% of the credit card limit as security. (In fairness to the banks, in the past they’ve been badly hit by foreigners running up large debts then leaving the country.)

Online banking is a mixed bag. I can’t have internet access to my Krung Thai bank accounts – only Thai nationals can have that. The Bank of Ayudhya system is badly designed and parts of it (such as “set up a favourite account for transfers” plain just don’t work. And the transaction retention period is poor (though not as pathetic as Barclays in the UK, which keeps only a month’s worth of transactions online). On the other hand, there’s no stupid electronic card reader required to access your account and make transfers. (How, exactly, is a card reader a great security device when all the card readers in the UK are functionally the same? If a criminal has your card and your PIN then his/her not having your card reader isn’t going to protect your hard earned cash.) Rather, the Thai banks rely on something much closer to Thai people’s heart: the mobile ‘phone. Every time I make a transfer a security code is sent to my mobile ‘phone which needs to be entered on the website within a few minutes to complete the transaction.

My main Thai bank shows no interest in me. Even though I maintain a high balance and have had a few very large transactions passing through (car, house) they have never tried to offer me any additional services. I don’t even get a free calendar at New Year, and have never been offered a free bank-branded umbrella or patriotic flags to put outside my abode. So, when I saw that Bangkok Bank on its website was offering accounts to foreigners – even those visiting on holiday – including a Visa debit card I thought I’d give it a shot.

At the branch, the first reaction was “can’t do”, followed by “come back with a Thai person” when I persisted. However, when I showed them some material printed from their website they eventually relented. In the end the process was fairly painless.

So far I’m pretty happy. It saves the hassle of finding an ATM and withdrawing cash – particularly for larger transactions. And there were a couple of nice surprises: transferring money from an existing account to my new account was instantaneous. (Is the delay in the UK still three working days?) And now, every time I log on to my new account or a transaction takes place I get an email and/or text message (user’s choice). I think the UK banking system could learn something from the Thai banks.

Something else the UK banks could learn about is “interest”. I was rather taken aback to see a line on my December statement of “Interest and Tax Deducted” – zero pounds zero pence. It seems that some time ago Nationwide stopped paying interest on its current accounts – not that they actually did anything to bring this to people’s attention as far as I know. In contrast my Thai accounts pay 0.625% per annum – hardly earth-shattering, but better than nothing.

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On Asset Allocation

Now I no longer work I depend upon my investments to sustain my lifestyle. True, in 16 years’ time I’ll be entitled to a state pension, though that date may well disappear into the future like a herd of wildebeest charging across the plain off into the sunset. And anyway, the value, even today, would be pretty minuscule. Who knows what it will be worth when I eventually receive it? So, the long and the short of it is that I depend upon the performance of my investments. That means I spend a lot of time thinking about them, and I’ve learned a few lessons along the way.

The key to performance isn’t choosing the right stocks or when to invest (so-called “market timing”). It’s asset allocation. When I was younger, this was easy. Equities returned, on average, about 12% a year over the longer term, bonds about half that. That made it easy: put all the money in equities and sit tight. Asian equities and emerging markets perform better than the more mature markets of Europe and the US, so put a fair chunk of the money into them.

When I moved to Thailand my strategy shifted. The conventional wisdom was that one needed to diversify. The logic was (put simplistically), bonds and equity prices tend to move in opposite directions in a given market situation, so by investing in both bonds and equities, if the equity markets are hit badly your bond investments will cushion the blow, and vice versa.

Of course, the key word here is “tend”. Market performance over the last few years has shown this tendency to be rather elusive.

Retail investors who want to diversify can buy “ready made” packages of bonds and equities, managed by expert fund managers, where the risk is managed for you. One group of such funds is known as “Cautious Managed” (a sector defined by the Investment Management Association). As you might imagine from the name, these funds are skilfully run so that you never lose money, and you see a steady but modest, gradual increase in your wealth … NOT! Here’s the average performance for that sector over the last five years (income reinvested):

Cautious Managed 5 Year Performance

So, over five years you’ll have seen your wealth increased by a measly 14.5% – less than 3% per annum – and that’s assuming that you’ve reinvested all your income. Of course, these are average figures. A few funds have done a little bit better. Many have done a lot worse and lost the investors a lot of money. (Of course, the fund managers continue to be paid their high salaries for their amazing expertise, and their employers continue to raking in the management fees from the hapless investors.)

Unfair! you might cry. The last five years have been very bad for the markets. True. Let’s look at the last ten years:

Cautious Managed 10 Yr Performance

42.3% over ten years is hardly impressive. Is it possible to do better? The answer is “yes”. Have a look at the following graph. It shows the performance of the Ruffer Total Return fund (blue line) over the last five years compared with the Cautious Managed sector (red line).

Ruffer Total Return 5 Yr Performance

Nice steady growth. 55.0% over five years. No major dips. Looks pretty good.

But perhaps Ruffer just got lucky. Surely they couldn’t replicate the performance in other markets? But yes they could.

Ruffer Funds 5 Year Performance

In the Pacific (the green line) they had pretty similar performance (61.9% over five years), whilst in Europe (the yellow line) they did even better (109.9% over the period).

These aren’t fancy funds using derivatives or taking short positions. They’re traditional, long-only funds investing in bonds and equities.

So, what’s the difference? The experts at Ruffer study the economy and shift between asset classes according to what they predict for the economy. If they think equities will perform better than bonds, they move more of the money they manage into equities. If they think that bonds will outperform equities, they shift to bonds. And if they think both will suck over the coming months they sell the bonds and shares and hold on to the cash.

Of course, in theory, this is exactly what all the cautious managed sector fund managers should be doing – but they (with lamentably few exceptions) just aren’t doing it right. Frankly, investors should be up in arms about the poor performance of their funds in this and similar sectors.

Unfortunately, the Ruffer funds aren’t available on the major platforms such as Fidelity Fundsnetwork and Cofunds, nor are similar funds such as Iveagh Wealth, so most investors don’t have access to them and are stuck with the mediocre offerings from the major fund managers.

But it didn’t set out when writing this post to extol Ruffer. Rather I wanted to show that the usual model as touted by investment magazines and financial advisors along the lines of “put 60% of your investments in equities, 25% in bonds and 15% in property” just doesn’t cut the mustard. Allocation across asset classes needs to be cyclical, and needs to be done right, for superior long term returns.

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Sterling Worthless

When I moved to Thailand the exchange rate was around 75 Baht to the pound. What’s happened to Sterling since then? The following graph is based upon the last six years’ interbank exchange rates.

THB-GBP Historic Exchange Rate

So, the pound’s value has dropped from 75 Baht to around 47 Baht. In other words, it’s lost 37% of its value. This hasn’t been a stepwise change, but rather a gradual but ceaseless errosion of worth. Let’s add a trendline to the graph, just to be sure.

THB-GBP Historic Exchange Rate with Trendline

Yup, that looks pretty linear.

Now let’s zoom out and extrapolate.

THB-GBP Exchange Rate Projection

It’s official. You read it here first. By 2021 – in just ten years’ time – the pound will be worthless.

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Greedy Bankers

A few months ago Thai banks imposed a 300 Baht fee for withdrawing cash using a foreign debit or credit card. That’s about ₤6.35 per transaction. In theory cartels are illegal in Thailand, but that didn’t stop every single bank imposing exactly the same exorbitant charge within a matter of days.

Nationwide Building Society (motto: “Proud to be different”) used not to charge for overseas withdrawals. Earlier this year they introduced a 1% charge on such transactions, and they’ve just increased that to 2% – plus an additional ₤1 per transaction charge for cash withdrawals. So, if I were to withdraw 5,000 ฿ (₤105.78) the Thai banks would take ₤6.35, Nationwide, would take ₤3.12, and I’d be left with ₤96.31. In other words, the banks between them would have taken 9% of my money, and that’s for a service that until recently they provided for free. Such usury is iniquitous. But what can one do is the face of the greedy, grasping banks?

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A Tale of Three Investments

Since I don’t work I depend upon my investments to provide me with the wherewithal for my modest lifestyle. That means that I spend a serious amount of time each week reviewing my investments and searching my heart to determine what I believe to be true about the world. However, sometimes I don’t get it right. This is a tale of three investments where I got it seriously wrong.

Corazon Capital Absolute Return Fund
One of my weaknesses is that I tend to take on more risk in my investments than I should. I really try to force myself to invest more conservatively than my gut tells me. One such conservative investment was the Corazon Capital Abolute Return fund. For years it has provided a nice, steady return of around 9% per annum – a bit better than cash, but not spectacular.

Then things went disastrously wrong. In 2008 it lost more than 30% of its value. Ouch!

The fund itself is a fund of hedge funds. (Yes, I know the charges associated with such funds are absolutely lunatic, but I hoped for a steady, risk free return.) The problem (in part) was that the fund invested in Weavering Capital’s Macro Fixed Income Fund. The fund was basically a fraud. Weavering apparently had the brilliant idea of not bothering to do any of the trading it was supposed to – rather it did a few trades with … its chief executive.

The FSA (that’s the Financial Services Authority to most of us, and the Fundamentally Supine Authority to Private Eye readers) is looking into things. I won’t be holding my breath. Personally I think there’s already enough evidence for the fund’s CEO to be strung up by his gonads until dead.

I do wonder, however, what Corazon was doing. Magnus Peterson (the fraudulent chief executive) had previously run another hedge fund into the ground. I paid a hefty premium so that Corazon can vet the hedge funds in which it invests. And yet it invests with someone like this scum bag.

To add insult to injury, Corazon decided to move a chunk of the fund into “Special Situations” class. This is USD denominated (and I loathe anything that is USD denominated), and can’t be sold. Over the coming years the investments will gradually be sold and I’ll get some money back. Still, not good enough.

And are Corazon offering to refund their pretty outrageous fees (for doing very little, and doing even that incompetently)? Uhhh … no! In fact, they can’t even be bothered to reply to my email.

To quote (selectively) from Gary Wiess’s “Wall Street Versus America” on the subject of hedge funds:

  • They cause people to pay fees that would be considered highway robbery in even the most wack-a-doo mutual fundamentally
  • They cause people to give their money to creeps they haven’t bothered to check out, the kind of people they wouldn’t trust to run out and buy then a sandwich, must less manage their investments
  • They cause people to sign contracts that are so one-sided they would make a credit-card lawyer blush

Wish I’d read that first.

Arch Cru Investment Portfolio
Diversification is said to be the only free lunch in investment. Beyond the usual equities, bonds and cash, private equity is a fairly common diversifier. Arch Cru provided a seemingly easy way to access this asset class. About half the funds’ assets were private equity. It sat in the “Cautious Managed” sector (according to the IMA) and was described as “low to medium risk”. Sounded good to me. How wrong I was!

The fund was suspended from dealing in March last year. Eventually, in December, we were told by Capita that the fund had dropped in value 40%. Huh! Surely it’s more likely that the underlying investments were grossly overvalued and that investors were basically being conned into buying those underlying investments at grossly overinflated prices.

Capita (or “Crapita” as they’re known to Private Eye readers) have been as fundamentally supine as the FSA. The flow of information has been, at best, treacly. In my mind there’s no doubt that there has been a serious fraud here. But no one’s doing anything about it.

And to top it all, Crapita says that it will take 3-5 years to realise the fund’s (seriously depleted) assets.

And they say lightening never strikes twice.

Carpathian IT
The last investment I got seriously wrong is Carpathian – a property company that invests in retail properties in Central and Eastern Europe. It has a good portfolio of properties and is well managed. However, the share price plunged 90%. Double ouch!

The share price is fundamentally irrational. It’s trading at a 73% discount to NAV. (Though even if the share prices bounces back to reflect NAV I’m still going to be hurting.)

As John Maynard Keynes (allegedly) said:

“The market can stay irrational longer than you can stay solvent.”

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Taxing Matters

The British government doesn’t treat its exiles very well. For example, whilst the pensions of pensioners living in the UK increase every year in line with inflation, the pensions of most expats are fixed at the time they retire. Inflation erodes the pension’s value over time, and what starts out as a trivial sum becomes a pittance.

But then expats don’t have a vote, and since governments are driven by expediency, rather than a moral compass, the expat will be done over every time.

For example, there’s the the discriminatory taxation of expats. Rev. Jonathan Mayhew is famous for proclaiming “no taxation without representation”, whilst James Otis put it a little more directly: “taxation without representation is tyranny”. Both these gentlemen were American just before American independence. They had no vote, just as I have no vote today. I guess British taxation was as odious then as it is now.

There’s discrimination in the treatment of inheritance tax for people with foreign spouses: whilst someone with a British spouse can leave ₤300,000 to their partner tax-free, a foreign spouse only gets a ₤65,000 allowance.

Now, I don’t like the idea of the tax man taking 40% of my hard-earned cash when I die. One way of getting around this is to be non-UK domiciled. Basically you have to prove that you’ve severed your links with the UK. Then only your UK assets are subject to UK inheritance tax. There’s no way I’d ever even consider returning to the UK to live – in my mind my domicile is now Thailand. If for some reason I had to leave Thailand I’d relocate to somewhere else in South East Asia. The tax man, however, may have a different idea – particularly when the prospect of stealing my savings when I’m gone arises.

In an attempt to clarify my domicile I wrote to the tax man. He was written back, refusing to comment on my domicile because … I’m not UK resident. Quite frankly, I think that’s outrageous; there shouldn’t be such uncertainty when it comes to taxation.

Anyway, I’m now in the process of moving my pension to Guernsey, where it will be beyond the tax man’s greedy grasp. I’m also contemplating moving the bulk of my investments to Luxembourg. This won’t exempt them from inheritance tax if I’m deemed to be UK domiciled, but will if I’m not. Such are the hoops we must leap through.

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