Article about investing

Here is an article I wrote as part of the recruitment process for a certain position.
Hope you will enjoy it.

------------------------------------------------------------------------
“Managed futures”
-another name for something a few people really understand-


You are a human being. And as such, are fundamentally driven by a few basic needs (people like Maslow have succeeded in showcasing this poignantly).
You knew that of course. So what?

Well, as day-to-day life goes by, you tend to forget it and get caught up.
Let’s take investing as an example.



When you want to invest your money, being your petty monthly savings or the millions you might have under management from the pension fund that employs you, the choices facing you are bewildering.
Try to go in a Turkish bazaar to buy “food”, having before you hundreds of items that perfectly fit that description, and you will begin to grasp the difficulty faced by someone wanting to invest money.
Beginning with the scope, size and objective of your wish, and ending with “tailor-made” investment solutions, you have to take into consideration countless advantages and disadvantages that are laid before you by “professional” people.
Here comes difficulty number one.

The same as in the bazaar where you rarely get to meet the actual producers of the things you buy, in the investment world you rarely get to meet the people that actually create, manage and direct the investment instruments.
You just deal with intermediaries, people that in many cases know as much as you (if not less) about the things they are selling.
Thus the first trap is getting past the “sales speech” and finding out all the small print.

Let’s say you managed to escape (pun intended) with your funds intact from that first wild encounter.

You still want to invest.
To do that, you begin to realize very fast that those people that studied finance and have years of experience in the field are actually useful.
They can tell head from tail of these “aliens” with such esoteric names as derivatives, margining, zero-cost hedging or portfolio stability. 
Whichever your decision, you get in headfirst and the outcome may be full of surprises.


Why?
Because it all revolves around two of those basic needs: greed and fear.

You want to win, big time if possible, and lose preferably nothing. It’s normal, and we all act the same. The same as all those in the OTC markets (a fancy name for largely unregulated player-to-player transactions) act and behave. You put money in, set your risk limit, and hope for the best.

But “no” you will say, “its not true”.
My investment manager is an experienced professional, knowing exactly when and how to get in and how to get out. He demonstrated this to me, with detailed reward-to-risk diagrams and historical performance charts detailing his XXX% yearly cumulated profits.
He does not rely on such trivial things as luck and hope.

Well, what can I say? it may be so.

Or maybe you should, before trying to make soup, read the recipe. You might still mess it up, but at least it was educated guessing.
In the case of the “investment soup” things are the same. It is true that big bucks can be made.
As true as the saying “you cannot win big without risking big”.

If by this point I still do not have you convinced to pay attention to those hot-shot fancy name funds, maybe you should go buy a lottery ticket. Maybe you really are lucky.

Now, about those “managed futures” in the title of my article.

Basically, they are speculative investment funds that concentrates on trading futures on multiple markets. No matter the complicated terms they use, the basics are the same, and it’s all about the “underlying”.

What is that? Well, that is the “thing” that you are trading the “future” of. It’s the actual instrument, like for example currencies, pork bellies or gold.
Depending on how the price of the instrument moves, and if you guessed the direction right, you either win or lose.
This is pure trading. No middle ground. Either hell or heaven.

So why the “confidence-giving” names you might ask. What is so special about the managed futures? Nothing really.
Apart from a smarter money management policy, the secret of success remains the same for a managed futures fund as with every other fund.
How fast it gets the information’s, how prompt is the execution, how intelligent and in control of his emotions is the trader, and how big of an axe can it wield (to read funds under management) these have been the secret of success for speculators ever since the early commodity-based markets of the medieval world.

Of course, open one of their websites and you will read statements like “By diversifying across a wide range of different markets which largely perform independently from each other” (and mark the wisely placed “largely”), “Sound managed futures funds like X are based on proprietary, fully automated technical trading systems” and  “a vast range of technical indicators and historical prices are analyzed by the computerized trading systems to automatically generate buy and sell signals”.
If I were new to this, I would just wet my pants in amazement, filling my heart with confidence over the superiority of those amazing “fully automated technical trading systems”. Plug them in, and out come rivers of money.

Now, any person with a minimum amount of common sense would take a step back and think for a moment. Sadly, these persons are fast becoming extinct, and along with them the increase of the bank accounts and credit lines of funds like the one above.

History repeats itself (e.g LCTM in the 1990s and over leveraging in the 2000s), and it will continue to.

In the humble opinion of the author, you should first make sure that you understand and accept the risks and benefits of what you are getting yourself into, weather you invest in the volatility of GBP/USD or managed futures.
Money have and will always be made either by hard working people putting blood and sweat in producing value for society (be it good or bad value), or by smart guys taking advantage of the complexity inherent to the financial system, speculating on those two fundamental needs we all have: greed and fear.
To start, you could read Nassim Taleb’s “The Black Swan” or Jack Schwager’s fabulous “Market Wizards”.
This is knowledge that will benefit you no matter how “smart” or “professional” you are, and it might potentially make you a lot of money. And if not, at least it will help you save some of them.

Here was a free advice, without management fees or 20% cut from the profits.
Can your money manager beat that?

Alexandru Ragalie, February 2009
------------------------------------------------------------------------