One of the oddest by-products of the Covid-19 pandemic is how it has affected many investors’ attitude to risk. Over the past three months nearly every client I have spoken to has become more risk-tolerant. Cautious investors have become balanced investors. Balanced investors have become risk-tolerant. And the risk-tolerant are all in the casino putting their life savings on zero at the roulette table. Why?!
We have seen recession before, stock markets correct cyclically and we are now very accustomed to very low interest rates over very many years. And I have never seen so much money going into Initial Public Offerings.
Risk is inherent in everything we do. It is impossible to live a risk-free life – but it is possible to mitigate risk to a point where it is non-existent. However, to eliminate risk in life might mean that life then was not worth living. Particularly in these Covid days 100% risk-mitigation would mean total isolation and that would be intolerable to most of us. The risk of catching a disease that kills less than 1% of those who contract it simply does not justify the pain of not being able to hold one´s spouse, children or grand-children. The idea of living a life devoid of human contact, surrounded by ventilators and drugs, just in case, is horrible and unacceptable to most
Perhaps Covid-19 has made people horribly aware that life is for living – and that is why so many of them are now willing to take qualified risks that they would not have considered six months ago. We have completely sold out shares in a very credible marijuana business; we have nearly sold out shares in an AKI/robotics business; and we are about to launch shares in a cyber security business. There are no guarantees but we expect to see gains of between five and fifty times purchase price. We have mitigated risk in these share purchases as far as we can but there is still danger.
And so it is the strangest of times to finally discover what appears to be a totally risk-free investment. For more than three decades I have been working out ways to mitigate and minimise risk and until now I would have said that every investment I have analysed has an element of risk. Often the risk is negligible but it has always been there. And this particular risk-free investment is in a product that trades commodities, currencies, shares and contracts which has never before been seen as even remotely safe. It pays 20% per annum with 5% sent to your bank account every three months and the initial commitment is only 12 months. High return, short investment period, regular coupons and no risk. How can that be possible?
Firstly, by trading in a way that cancels out risk – buying nothing until you have contracted its onward sale. Secondly, by insuring both capital and interest against failure. And thirdly, by insuring against fraud or theft anywhere in the chain.
It is probably easiest to explain this by publishing ten of the questions that I asked of the provider and their insurer.
- What is the investment? The investment is a 12-month arbitrage bond with full capital and interest insurance protection from Lloyd´s of London.
- How much does it pay me and when? It pays 20% per annum – 5% every 91 days.
- What penalties if I exit after 12 months? There are no penalties for exit and if you like it you can extend for either threeor five
- Where does my money go? Your capital is held in a non-depletion account where it is borrowed against by teams of the best arbitrage traders in the business.
- How is it traded? Traders exploit price differences between different markets. Arbitrage trading technically has no risk because traders do not buy an asset until they have pre-sold it at a profit – so the profit is locked in and losses are locked out.
- What happens if those traders somehow lose money? They are also insured and if traders lost money and could not recover it then Lloyd´s of London would return the capital and the interest owed to the investor. They do this immediately and then recover the money from the trader´s insurers in order to repay the capital and the interest that is owed to the investor.
- What if it is all a scam and the money is stolen? Lloyd´s of London have done deep due diligence so they can insure it and so it is not a scam. But if monies were stolen then every investor is covered for up to £250k against fraud or theft
- What if the traders make a genuine mistake and lose everything? If a trader buys the wrong product at the wrong price by mistake then it might be possible to lose money. This is called a “fat finger” claim (old men like me do this regularly on WhatsApp messages!) and even this is covered by the insurance policy and so is de-risked.
- How can you afford to pay such a big coupon? Arbitrage traders invest tens of millions of pounds several times every working day. A good arbitrage trader willmore than double their invested money several times every year and so a coupon of 20% is only a small percentage of the profit your money will earn.
- Why isn´t everyone doing it? You need at least £100m in cash to trade arbitrage as a trader and the minimum individual investment is usually around £1m. These markets have been restricted to the ultra-rich and the banks until very recently. The market has existed since 1950 so this is not new to financiers but it is new to normal investors.
So is there a catch? The only barrier to this investment is the entry level which is normally £100k.
In terms of a structured investment this is the best thing that I have seen since 1987 – guaranteed regular income, exceptional return and absolute security up to £250k of invested money. But is it badly timed? Would the new risk-tolerant investors prefer to trade directly and make twenty times the return with none of the guarantees? Time will tell.
Jon Pedley is Chief Operating Officer, Investment Owl.
For more information on this or anything financial contact [email protected]