Friday, 27 September 2019

CFA Institute Investment Foundations Program: Chapter 12 – Alternative Investments (Part I)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 12 provides an overview of alternative investments. The learning outcome of chapter 12 is as follows:

·       Describe advantages and limitations of alternative investments;
·       Describe private equity investments;
·       Describe real estate investments;
·       Describe commodity investments.
If a public company needs funds to invest in a project, perhaps to build a new production facility or to expand its operations abroad, it may turn to the financial markets and issue the types of debt and equity securities discussed in the Debt Securities and Equity Securities chapters. But what if an entrepreneur needs money to start a promising new business? Or what if a young company needs funds to grow, but it is not established well enough to seek an initial public offering? The entrepreneur and the young company are not established well enough to issue debt or equity securities to the public. In addition, although they may seek loans from banks, the amount of money they can borrow is often limited. Banks often do not finance new and young companies because the risk of not getting the money back is too high. So, entrepreneurs or young companies may turn to the venture capital sector to obtain the money they need. Venture capitalists specialise in financing new and young companies. They provide entrepreneurs and young companies with both the capital and the expertise to launch and grow their businesses.

Venture capital is a form of private equity, which is itself a type of alternative investment. From an investor’s point of view, alternative investments are diverse and typically include the following:

·       Private equity: investments in private companies—that is, companies that are not listed on a stock exchange
·       Real estate: direct or indirect investments in land and buildings
·       Commodities: investments in physical products, such as precious and base metals (e.g., gold, copper), energy products (e.g., oil), and agricultural products that are typically consumed (e.g., corn, cattle, wheat) or used in the manufacture of goods (e.g., lumber, cotton, sugar)

Private equity, real estate, and commodities are all considered alternative because they represent an alternative to investing exclusively in “traditional” asset classes, such as debt and equity securities. Although alternative investments have gained prominence in the 21st century, they are not new; in fact, real estate and commodities are among the oldest types of investments.

Exhibit 1 shows the results of a global survey of institutional investors regarding their holdings of different assets. As of March 2012, almost 100% of respondents invest in equity and debt. But 94% of them also hold some type of alternative investments. On average, 22.4% of the respondents’ portfolios are invested in alternative investments, with the most popular types being private equity and private real estate.

Investors add alternative investments to their portfolios for two main reasons:

·       to enhance returns and
·       to reduce risk by obtaining diversification benefits.

Although alternative investments have the potential to enhance returns and reduce risk, they also have limitations. Typically, alternative investments are

·       less regulated and less transparent than traditional investments,
·       illiquid, and
·       difficult to value.

Exhibit 2 shows historical returns for various asset classes between 1990 and 2009. It indicates that over the 20-year period, investments in private equity and real estate have outperformed investments in equity and debt securities. However, you should not conclude from this exhibit that alternative investments always offer higher returns than other asset classes. During the global financial crisis that started in 2008, many investors suffered losses on their private equity and real estate investments and some of these losses were worse than those on traditional investments, such as publicly traded equity.

Alternative investments most likely: free polls

Wednesday, 25 September 2019

Why did Thomas Cook Collapse?

The immediate answer is that it was unable to secure a £200m lifeline from bankers/Government or investors.

But really is that it? It goes back 12 years earlier (2007), when a merger with MyTravel proved disastrous. Then debts ballooned to £1.7 billion and the internet revolution in holiday booking upset traditional high-street sales. Add Brexit uncertainty and the heatwave last summer, you have the ingredients for a collapse.

The British public has continued to take holidays and 60% of the population did so in 2018 (up from 57% in 2017). The winners are Ryanair, easyJet and Airbnb and the losers are package holiday companies with expensive high street outlets. (Thomas Cook owns 560 such outlets). Just one in seven people walk into a high street travel agency and these are the senior citizens – 65 years and above with less money to spend.

Tui, the Anglo-German rival, has smaller debts, owns hotels and cruise ships as compared to Thomas Cook, who were not ready for the 21st Century. Thomas Cook narrowly survived a near-death experience in 2011. Its debt pile was already £1.1 billion and stayed afloat with emergency cash injection. Since 2011, Thomas Cook has paid out £1.2 billion in interest and that is a quarter of the money charged for 11m holidays sold every year. Fosun, the Chinese group, come in 2015 as part of a plan to build global holiday and entertainment conglomerate. In August 2019, Fosun agreed to a cash injection of £450m for a majority stake with banks to convert debt into equity.

Thomas Cook employs 21,000 people and is the world’s oldest travel company, founded in 1841. The company had 19 million travellers a year in 16 countries generating £9.6 billion in revenue. More than 600,000 people used its services, including 150,000 British citizens.

What next?

AlixPartners UK LLP or KPMG will be appointed as special managers for the different parts of the business. An order has been granted to liquidate the company.

Not everyone lost out with the collapse of Thomas Cook. Speculators including Sona Asset Management and XAIA Investment GmbH stand to earn as much as USD250 million from the bankruptcy. They invested in credit default swaps (CDS). The CDS would be worthless if Thomas Cook's rescue went through. So it was in the interest of hedge funds for Thomas Cook to default.

What can we learn?

Cashflow is key to survival – six months forward in your till. Engineering change and adapting to environment are essential. In fact, leading change is important. But when you are too big, you become a little complacent. Borrowing from banks must be minimal, unless you aim to collapse the company. Bankers, world-wide, are driven by policies, credit scores, risk profile and all the rest of it! Compassion is not in their vocabulary unless a central bank steps in with debt resolution mechanisms for banks to adapt. Remain agile in a fast-changing environment. Trust in God (and not the bankers!).


1. Thomas Cook collapses as last-ditch rescue talks fail, 23 Sept 2019, BBC News
2. Patrick Collinson, Why did Thomas Cook collapse after 178 years in business?
3. Kate Holton & Guy Faulconbridge, Thomas Cook collapses - What next and why?

Tuesday, 24 September 2019

The 20 Internet Giants That Rule the Web

Many of the top websites in 1998 were basically news aggregators or search portals, which are easy concepts to understand. Today, brand touch-points are often spread out between devices (e.g. mobile apps vs. desktop site) and a myriad of services and sub-brands (e.g. Facebook’s constellation of apps). As a result, the world’s biggest websites are complex, interconnected web properties.

For millions of curious people the late ’90s, the iconic AOL compact disc was the key that opened the door to the World Wide Web. At its peak, an estimated 35 million people accessed the internet using AOL. By 1999, the AOL rode the Dot-com bubble to dizzying heights, with a valuation of $222 billion dollars.

AOL’s brand may not carry the caché it once did, but the brand never completely faded into obscurity. The company continually evolved, finally merging with Yahoo after Verizon acquired both of the legendary online brands. Verizon has high hopes for the company – called Oath – to evolve into a “third option” for advertisers and users who are fed up with Google and Facebook.

As internet usage began to reach critical mass, web hosts such as AngelFire and GeoCities made it easy for people to create a new home on the Web.

GeoCities, in particular, made a huge impact on the early internet, hosting millions of websites and giving people a way to actually participate in creating online content. If the web host was a physical place, it would’ve been the third largest city in America, just after Los Angeles.
This early online community was at risk of being erased permanently when GeoCities was finally shuttered by Yahoo in 2009, but the nonprofit Internet Archive took special efforts to create a thorough record of GeoCities-hosted pages.

In December of 1998, long before Amazon became the well-oiled retail machine, the company was in the midst of a massive holiday season crunch.

In the real world, employees were pulling long hours and even sleeping in cars to keep the goods flowing, while online, had become one of the biggest sites on the internet as people began to get comfortable with the idea of purchasing goods online. Demand surged as the company began to expand their offering beyond books.

Meredith – with the possible exception of Oath – may be the most unrecognizable name to many people looking at today’s top 20 list. While Meredith may not be a household name, the company controls many of the country’s most popular magazine brands (People, Sports Illustrated, Health, etc.) including their sizable digital footprints. The company also has a number of local television networks in the United States. After its acquisition of Time Inc. in 2017, Meredith became the largest magazine publisher in the world.

When people have burning questions, they increasingly turn to the internet for answers, but the diversity of sources for those answers is shrinking. Even as recently as 2013,,, and were still among the biggest websites in America. Today though, Google appears to have cemented its status as a universal wellspring of answers.

As smart speakers and voice assistants continue penetrate the market and influence search behavior, Google is unlikely to face any near-term competition from any company not already in the top 20 list.

Social media has long since outgrown its fad stage and is now a common digital thread connecting people across the world. While Facebook rapidly jumped into the top 20 by 2007, other social media infused brands took longer to grow into internet giants.

In 2018, Twitter, Snapchat, and Facebook’s umbrella of platforms were are all in the top 20, with LinkedIn and Pinterest not far behind.


Nick Routley, The 20 Internet Giants That Rule the Web

Monday, 23 September 2019

Cost of War with Iran: Another Disaster?

About 17 years ago President George W. Bush was persuaded to invade Iraq on alleged “weapons of mass destruction” held by Saddam Hussein. That decision was made on some dubious intelligence, contrary to any advice of U.S. allies and then precipitated a humanitarian crisis.

The bill for that venture was USD6 trillion so far and still counting. Nearly 7,000 Americans have been killed and more than 600,000 U.S. troops injured. Opinion Research (ORB)’s study estimates 1.0 million Iraqis have been killed in 2007. That figure rises to over 2.4 million on current estimates (Code pink for Peace). War cannot bring regime change.

The U.S. Federation of Scientists estimates that even limited U.S. military action against Iran would cost USD60 billion to USD2 trillion – in the first 3 months alone! Oil prices climbed from USD23 per barrel in 2003 to USD140 per barrel by summer of 2008. War with Iran will most certainly disrupt supply and spike prices to USD250 per barrel (according to industry experts).

The cost of war has been paid by the national “credit card” – borrowed money, not taxes. Consequently, U.S. national debt is at its highest since World War II. The burden of debt will fall on lower/middle income households and on future generations of Americans.

The Trump policy of withdrawing troops from conflict zone of Afghanistan and Iraq runs contrary to bellicose, go-for-broke tactics in dealing with Iran. The maximum pressure campaign is bad enough – it may not change Iran’s behaviour and is merely ratcheting up tensions that may accidently get out of hand.

A better course is to re-enter the Iran nuclear deal and “tweak” it to suit U.S. interests. But that may require a new administration. However, with Bolton out of the picture, maybe some parties may get their way to a peaceful resolution to the Iran conflict.

1. War with Iran will cost more than the Iraq and Afghanistan wars, Linda J Bilmes, Rosella Cappella Zielinski and Neta C Crawford, June 24, 2019 (

2. War with Iran would be disastrous and enormously costly, Wiliam Hartung, Sept 5, 2019 (


Friday, 20 September 2019

CFA Institute Investment Foundations Program: Chapter 11 – Derivatives (Part III)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 11 provides an overview of derivatives. The learning outcome of chapter 11 is as follows:

·       Define a derivative contract;
·       Describe uses of derivative contracts;
·       Describe key terms of derivative contracts;
·       Describe forwards and futures;
·       Distinguish between forwards and futures;
·       Describe options and their uses;
·       Define swaps and their uses.

Options give one party (the buyer) to the contract the right to demand an action from the other party (the seller) in the future. In an option contract, the buyer of the option has the right, but not the obligation, to buy or sell the underlying. Options are termed unilateral contracts because only one party to the contract (the seller) has a future commitment that, if broken, represents a breach of contract. Unilateral contracts expose only the buyer to the risk that the seller will not fulfil the contractual agreement.

There are two basic types of options: options to buy the underlying, known as call options, and options to sell the underlying, known as put options.

·       An investor who buys a call option has the right (but not the obligation) to buy or call the underlying from the option seller at the exercise price until the option expires.
·       An investor who buys a put option has the right (but not the obligation) to sell or put the underlying to the option seller at the exercise price until expiration.

Call options protect the buyer by establishing a maximum price the option buyer will have to pay to buy the underlying; the maximum price is the exercise price.

·       A call option is said to be “in the money” if the market price is greater than the exercise price. In this case, the option would be exercised.
·       A call option is “out of the money” if the market price is less than the exercise price. In this case, the option would not be exercised.
·       A call option is “at the money” if the market price and exercise price are the same. In this case, the option may be exercised.

Put options protect the buyer by establishing a minimum price the option buyer will receive when selling the underlying; the minimum price is the exercise price.

·       A put option is said to be “in the money” if the market price is less than the exercise price. In this case, the option would be exercised.
·       A put option is “out of the money” if the market price is greater than the exercise price. In this case, the option would not be exercised.
·       A put option is “at the money” if the market price

Option premiums are expected to compensate option sellers for their risk. The option premium represents the maximum profit that the option seller can make. If an option seller underestimates the risk associated with the option, the premiums may be far less than the losses incurred if the option is exercised.

The following table shows the effects on an option’s premium for a call option and a put option of an increase in each factor.

Swaps are typically derivatives in which two parties exchange (swap) cash flows or other financial instruments over multiple periods (months or years) for mutual benefit, usually to manage risk.

Swaps in which two parties exchange cash flows include interest rate and currency swaps. An interest rate swap, the most common type, allows companies to swap their interest rate obligations (usually a fixed rate for a floating rate) to manage interest rate risk, to better match their streams of cash inflows and outflows, or to lower their borrowing costs. A currency swap enables borrowers to exchange debt service obligations denominated in one currency for equivalent debt service obligations denominated in another currency. By swapping future cash flow obligations, the two parties can manage currency risk.

Credit default swaps (CDS) are not truly swaps. Like options, credit default swaps are contingent claims and unilateral contracts. One party buys a CDS to protect itself against a loss of value in a debt security or index of debt securities; the loss of value is primarily the result of a change in credit risk. The seller is providing protection to the buyer against declines in value of the underlying. The seller does this in exchange for a premium payment from the buyer; the premium compensates the seller for the risk of the contract. The contract will specify under what conditions the seller has to make payment to the buyer of the CDS. Similar to sellers of options, sellers of CDS may misjudge the risk associated with the contracts and incur losses far in excess of payments received to enter into the contracts.

Which of the following options would be described as being in the money? free polls

Wednesday, 18 September 2019

Wealth Tax: Would It Work in the U.S.?

A group of wealthy Americans have been urging the US presidential candidates to tax them more. “The next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans,” they said.

The group pointed out that a wealth tax could help address the climate crisis, improve the economy, improve health outcomes, fairly create opportunity, and strengthen the democratic freedoms. Instituting a wealth tax is in the interest of the republic.

Several candidates for President, including Senator Elizabeth Warren, Mayor Pete Buttigieg, Representative Beto O’Rourke, and Representative Tim Ryan are already supportive of the idea. In January 2019, Senator Warren proposed to raise taxes on American households with a net wealth greater than $50 million, which would only affect 75,000 of the wealthiest families in the country. The proposal is straightforward: It puts in place a tax of 2 cents on the dollar on assets after a $50 million exemption and an additional tax of 1 cent on the dollar on assets over $1 billion. It is estimated to generate nearly $3 trillion in tax revenue over ten years.

The Brookings paper, written by economists Emmanuel Saez and Gabriel Zucman — who are also Warren’s economic advisors addresses some of the key criticisms of Warren’s proposal:

1. Wealth taxes have failed in Europe

14 European countries had a wealth tax in 1996, but eight of the countries abandoned them by 2019. Saez and Zucman argue that the wealth tax repealed in Europe were the result of poor policy choices. Due to low exemption thresholds, European wealth taxes were levied on households with little cash but substantial illiquid wealth. To avoid this problem, Elizabeth Warren has included an exemption threshold of $50 million in her wealth tax proposal, which is 50 times higher than the typical European wealth tax.

2. Tax evasion problem

Saez and Zucman note that the passage of the Foreign Accounts Tax Compliance Act (FATCA) puts the U.S. in a better position, compared with Europe to combat this problem. The authors also recommend requiring third parties like financial institutions, instead of household self-reporting to inform wealth balances to the IRS.

3. Reduction in the capital stock or a decrease in innovation

By using the tax revenue to fund Warren’s projects, wealth inequality will stabilize. Saez and Zucman argue that reduction in capital stock could be offset by increasing savings from the rest of the population and the government. In terms of the effects on innovation, Saez and Zucman reason that most innovation is produced by young, not wealthy individuals (the wealthy tend to be much older than average), who would not be impacted by a high-exemption wealth tax. Moreover, Saez and Zucman argue that established businesses spend resources protecting their dominant market positions which reduces innovation. As a result, a wealth tax that only collects taxes from established business owners could increase competition and thus innovation.

Saez and Zucman pointed out that the greatest injustice of the US tax system today is its regressivity at the very top: billionaires in the top 400 pay less (relative to their true economic incomes) than the middle class. Of about 40 countries, the US is the sixth highest in terms of wealth concentration, according to data from the Organization for Economic Co-operation and Development.

The super-wealthy who have signed the open letter believe that by taxing them the wealth inequality could be slowed down. The wealth tax would be a key to both addressing climate crisis, and a more competitive, stronger economy that would better serve millions of Americans.


1. An Open Letter to the 2020 Presidential Candidates: It’s Time to Tax Us More, 24 June 2019
2. Francisca Alba, Estimating the economic impact of a wealth tax
3. Kate Patrick, Economists Weigh Whether Elizabeth Warren’s Wealth Tax Would Actually Work
4. Russell Hotten, US billionaires' group calls for wealth tax

Tuesday, 17 September 2019

Hong Kong Protests: Who Funds It?

The demonstrations in Hong Kong, have a global impact. What are the forces behind this movement? Who provides the funds and who stands to benefit?

The increasingly violent demonstrations in Hong Kong are completely embraced and enthusiastically supported in the U.S. corporate media and all the political parties in the U.S. and Britain. This should be a danger sign to everyone fighting for change and for social progress.

The disruptive actions involve helmeted and masked protesters using gasoline bombs, flaming bricks, arson and steel bars, random attacks on buses, and airport and mass transit shutdowns. Among the most provocative acts was an organized break-in at the Hong Kong legislature where “activists” vandalized the building and hung the British Union Jack.

The New York Times described the airport shutdown: “The protests at the airport have been deeply tactical, as the largely leaderless movement strikes at a vital economic artery. Hong Kong International Airport, which opened in 1998, the year after China reclaimed the territory from Britain, serves as a gateway to the rest of Asia. Sleek and well run, the airport accommodates nearly 75 million passengers a year and handles more than 5.1 million metric tons of cargo.” (Aug. 14)

U.S. media have consistently labelled these violent actions “pro-democracy.” But are they?

Hong Kong police are denounced in the U.S. media for violence, but actually have shown great restraint. Despite months of violent confrontations, with flaming bottles constantly thrown, no one has been killed.

There is no such favourable media coverage or support from U.S. politicians for demonstrations of desperate workers and peasants in Honduras, Haiti or the Philippines, or for the Yellow Vest movement in France. There is never an official condemnation when demonstrators are killed in Yemen or Kashmir or in weekly demonstrations in Gaza against Israeli occupation.

While Hong Kong protests receive widespread attention, there is no similar coverage of or political support for Black Lives Matter demonstrations in the U.S. or the masses protesting racist Immigration and Customs Enforcement raids and roundups of migrants.

The escalating demonstrations are linked to the U.S. trade war, tariffs and military encirclement of China. Four hundred—​half—​of the 800 U.S. overseas military bases surround China. Aircraft carriers, destroyers, nuclear submarines, jet aircraft, Terminal High Altitude Area Defense missile batteries, and satellite surveillance infrastructures are positioned in the South China Sea, close to Hong Kong. Media demonization is needed to justify and intensify this military presence.

Encouraging the demonstrations goes hand-in-hand with international efforts to bar Huawei 5G technology, the cancelation of a joint study of cancer and the arrest of Chinese corporate officers. All these acts are designed to exert maximum pressure on China, divide the leadership, destabilize economic development and weaken China’s resolve to maintain any socialist planning.

British imperialism, in the 155 years it ruled Hong Kong, denied rights to millions of workers. There was no elected government, no right to a minimum wage, unions, decent housing or health care, and certainly no freedom of the press or freedom of speech. These basic democratic rights were not even on the books in colonial Hong Kong.

Hong Kong is stolen land. This spectacular deep-water port in the South China Sea, was seized by Britain in the 1842 Opium Wars. After negotiations with Britain had dragged on through the 1980s, the British imposed another unequal treaty on the People’s Republic of China.

Under the 1997 “One Country, Two Systems” agreement that officially returned Hong Kong, Kowloon and the New Territories to the PRC, Britain and China agreed to leave “the previous capitalist system” in place for 50 years.

In 1997 Hong Kong’s gross domestic product was 27 percent of China’s gross domestic product. It is now a mere 3 percent and falling. Much to U.S. and British frustration, the world’s largest banks are now in China and they are state-owned banks.

For the last 10 years wages have been stagnant in Hong Kong while rents have increased 300 percent; it is the most expensive city in the world. In Shenzhen, wages have increased 8 percent every year, and more than 1 million new, public, green housing units at low rates are nearing completion.

What confounds the capitalist class, far more than China’s incredible growth, is that the top 12 Chinese companies on U.S. Fortune 500 list are all state-owned and state-subsidized. They include massive oil, solar energy, telecommunications, engineering and construction companies, banks and the auto industry. (, July 22, 2015)

U.S. corporate power is deeply threatened by China’s level of development through the Belt and Road Initiative and its growing position in international trade and investment.

Over the past month, the media has been reporting that groups involved in the protests have received significant funding from the National Endowment for Democracy (NED), “a CIA soft-power cut-out that has played a critical role in innumerable US regime-change operations, ” according to writer Alexander Rubinstein.

The report claimed that the NED has four main branches, at least two of which are active in Hong Kong: the Solidarity Center (SC) and National Democratic Institute (NDI).

“The latter has been active in Hong Kong since 1997, and NED funding for Hong Kong-based groups has been consistent,” Louisa Greve, vice president of programmes for Asia, Middle East and North Africa, was quoted.

While NED funding for groups in Hong Kong goes back to 1994, 1997 was when the British returned the territory to China, it was reported.

The report said in 2018, NED granted US$155,000 (RM645,885) to SC and US$200,000 (RM833,400) to NDI for work in Hong Kong, and US$90,000 (RM375,000) to Hong Kong Human Rights Monitor (HKHRM), which isn’t a branch of NED, but a partner in Hong Kong. Between 1995 and 2013, HKHRM received more than US$1.9mil (RM7.9mil) in funds from the NED.

The NED was set up in 1983 to channel grants for “promoting democracy” and it’s said that it receives US$100mil (RM416mil) annually from relevant agencies.

The U.S. is demanding that China abandon state support of its industries, the ownership of its banks and national planning. But contrasting the decay, growing poverty and intense alienation in Hong Kong with the green vibrant city of Shenzhen across the river shows that there are two choices for China today, modern socialist planning or a return to the colonial past.


Sara Flounders, Follow the money behind Hong Kong protests
The cost of the Hong Kong protests, 4 August 2019, The Star