In our household, the political discussions are vigorous. Trump, Trudeau, deficits and pipelines are regularly in the mix. For me, however, one of the biggest issues facing society today is increasing complexity. How do we cope with the complexity that comes with rapid technological change and unconstrained information flow via social media? And more to the point, how do governments and regulators deal with it?
When it comes to investing, I’ve long felt that complexity should be added to the list of core risks. Traditionally, risk has been put into four buckets: interest rates; credit (or default); equity and liquidity. Each brings with it the possibility of increased volatility and capital loss, but also the potential to earn a return above the risk-free rate. There’s no way around it — you need some combination of the four to do better than the yield on a GIC or government T-bill.
One of the problems with adding complexity to the list is that it’s not as productive as the others. Indeed, if we were charting it, the line would tend to go in the opposite direction — i.e. the more complex, the lower the long-term return.
Of course, I’m generalizing. Like all investment strategies, outcomes can vary widely. For instance, many highly engineered products do just fine (just as most high-risk bonds don’t default and few stocks go to zero) but they carry more baggage than other investments do.
Transparency lost
Complicated fund structures suffer from a lack of transparency. It’s not always clear, even when you read the fine print, what’s driving the return and where the potential risks are. Selling documents often hide behind words like “dynamic hedging” and “risk parity” which sound cool but say nothing about where the risks lie.
With a lack of transparency comes unexpected results. It’s only after a disappointing result that you’re told about the impact of widening credit spreads, increased (or decreased) volatility or other market factors.
This year, Albertans learned this firsthand. AIMCo, the province’s investment management arm, saw its volatility trading strategy blow up, causing a $2-billion loss. It was clear afterwards that management didn’t fully understand the range of possible outcomes.
Too many mouths to feed
A big contributor to lower returns is cost. Every new product feature brings with it more people and bottom lines to feed. Investment bankers, currency and derivative traders, prime brokers, lawyers and salespeople don’t come cheap.
And in many cases, the sponsor takes a healthy slice of the spoils, either through a performance fee or additional shares.
A different goal
In addition to the heavy baggage, however, there’s a good reason why complex investment products offer a lower return. Typically, they’re not trying to maximize return. Rather, they’re seeking to provide a smoother pattern of returns by using diversification, hedges and innovative structuring. These strategies are aimed at reducing the volatility that normally comes with holding corporate bonds and stocks.
Liquid-alt funds, an emerging fund category using alternative strategies, are trying to do just that, as are Canada’s most popular structured products — index-linked notes. These notes are sold in the bank branch and are designed to give holders some stock market exposure with no downside risk. Unfortunately, they too have poor transparency and high fees. The notes are linked to price indexes that don’t include dividends, and the sponsoring banks promote cumulative returns which makes it hard to compare them to other funds and GICs. Needless to say, they’re a healthy contributor to the profitability of multiple bank divisions.
Buyer beware
If you’re being encouraged to buy something you don’t understand, push the pause button and start asking questions. You need to understand who the key decision makers are, where the return will come from, what could cause it to go south, how it complements your other investments, and to what degree your advisor understands it.
There are no bad questions, only bad answers. If you’re told “there are no risks”, “it’s a big seller”, or “trust me”, then keep probing. Complexity brings with it a new set of unknowns and a lot of extra cost.
Tom Bradley is
chair and chief investment officer
at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at
tbradley@steadyhand.com
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
