Good Morning Chiangmai News Magazine

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FINANCIAL AFFAIRS

MANAGED CURRENCY ACCOUNTS

Several expatriates I know hold currency trading accounts and multi-currency accounts with major banks. They feel comfortable being close to cash and are willing to 'have a punt' with foreign exchange rates. They are certainly looking in a good area, though usually without the technical ability to make the kind of profits possible under a strictly controlled-risk currency management programme.

I have traded in both the interbank foreign exchange market (turnover around $1.4 trillion a day) and in the ever more liquid currency futures markets. There are advantages to each, but this month I will discuss forex trading, where the risks are less obvious to private investors.

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Anthony Purkis of Strategic Investment Advisers with wife Kanya and daughter Andessa, outside their home in Chiangmai

Anthony Purkis was born and educated in the UK, after living for 7 years in Malaysia as a young child Working since 1987 as a consultant, Anthony has run his own firm in the UK and has worked for leading investor relations companies and a major banking group. He has been an expatriate for 10 years and came to live in Thailand with his Thai wife and 3 yearold daughter in March 2001, although his happy association with this country goes back to 1994.

After brief experiences with expatriate investment consultancies in Thailand and Kuala Lumpur, Anthony decided to work outside the insurance company investment regime and to focus on more results-driven areas of personal finance. On the retail side, Strategic Investment Advisers specialises in analysing alternative investment funds, drawing on Anthony's past futures trading and capital markets experience.

Forex is still the less regulated of the two, although in the USA now, forex brokerages register with the Commodities Futures Trading Commission and National Futures Association. The futures markets operate on tightly-regulated exchanges that have strict controls on members, so obviating price and spread manipulation and counterparty risk. Most forex brokers, however, are making a market for their clients and at the same time knowing the client's position. This is not entirely healthy and encourages 'fading' the client's bid or offer to make a profit of a 'pip' or two themselves. A professional trading adviser will be aware of which firms to avoid.

Let me explain a little more of the potential for those who want 10-20% of their funds in professionally managed currency trading. First, client funds are held in segregated accounts where clients have sole deposit/withdrawal rights. If under a CTA's master account, the client has 'read-only' access which gives the advantage of seeing net asset value, profit and loss, in real time. You can also generate your own statements.

As with futures brokers, forex firms will make strict signed agreements between Financial Advisers, themselves, and you. This structure will stipulate the FA's or CTA's performance fees and how these can be claimed and remitted. The brokerage itself should be under one national regulatory authority or another, which also means they are monitored for market exposure.

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One feature of forex - although futures can be risk-adjusted - is that the leverage on your account can be set by you. This means that instead of taking the broker's normally offered 50:1 margin ratio (whereby you deposit only 2% of the underlying value of the currency lot), your trading adviser will probably work on 10%, or even 20%. This reduces the drawdown on your capital and potential losses. An average low-risk trader will achieve an average 5% to 10% positive absolute return monthly, with a volatility of no more than 10%.

Costs

Of your gains, no more than one-fifth will have been remitted in performance fees. Commission should not be an issue either: forex brokers brag that they don't charge commission on transactions, but the futures markets have tighter spreads (difference between bid and offer prices) and futures contracts commissions can be as low as a dollar each turn. Commission does not affect your profitability to any significant degree. With regard to other fees, there should not be any, although some CTAs may charge an annual management fee of a couple of percentage points.

My firm, Strategic Investment Advisers, does not do so, as I personally hate management charges.

When deciding on a trading adviser, you need to read the biodata of their directors and performance records. Both can be faked, a risk that you can hardly avoid if the adviser is in New York and you are in Chiangmai.

SIA offers a beta client live simulated trading, with buy/sell decisions e-mailed or faxed to them in real time - for at least a couple of weeks. Then we compile a full report and analysis, including risk exposure, etc. Only if they are totally comfortable, will we take them on as an alpha.

Investor advantages

Remember, your funds are in the hands of a money manager who has the authority to exercise their own trading style and strategy. While this generally gives better results than most hedge funds, your investment objectives need to be in tune with those of your FA.

If the adviser is good, then you have a number of additional factors behind you. Diversification at every level: exposure to different currency pairs; independence from global equity and bond markets. Also, the ability to hold long and short positions means being able to profit regardless of currency market direction, or what underlying economies are doing.

Anthony G.Purkis