Dear Mr. Tan,
Is it better to buy a long term investment portfolio offered by banks or to buy company shares directly from a broker? What's your advise?
REPLY
It is better to invest in a professionally managed fund, provided that the expense ratio is kept below 1%.
The advantages are:
a) Diversification. You are invested in a large number of shares, and not in a few shares
b) Stock picking. You do not have to worry about stock picking. It is done by the fund manager
c) Transaction. You do not have to take care of collecting dividends, subscribing to rights issues, paying for share purchases and other tedious tasks. They are done by the fund.
Let the professionals take care of the investments (if the fees are modest).
However, if you have a large sum to invest (say, more than $1 million) and you can afford to spend the time to take care of the investments, you can buy the shares through a stockbroker. You will save the fees charged by the fund, but you have to do the work on your own.
Thursday, April 3, 2008
Hedge Funds
Someone asked me to explain a hedge fund. Here is an explanation from Wikipedia, accessed through Google.
A hedge fund is a private investment fund that charges a performance fee and is typically open to only a limited range of qualified investors.
Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, 55% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, as well as 30% of equity trades.
Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt.
Alfred Winslow Jones is credited with inventing hedge funds in 1949.
In the United States, in order for an investment fund to be exempt from direct regulation, it must be open to accredited investors only and only a limited number of investors can belong to it.
While there is no legal definition of "hedge fund" under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from the types of regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and riskier investments than a public fund might.
Hedge funds managed from other countries have similar relationships with their national regulators. As a hedge fund's investment activities are therefore limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.
As their name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling.
However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.
Hedge funds have acquired a reputation for secrecy. Being outside the regulatory regime that applies to retail funds greatly reduces the information a hedge fund is legally required to make public. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.
The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Their sway over markets, whether they succeed or fail, is therefore potentially substantial and there is a continuing debate over whether they should be more thoroughly regulated.
COMMENT BY TAN KIN LIAN
A big risk in hedge fund is that its investment is "multipled by leverage". They borrowed additional funds at the market rate of interest to increase their investments. During the market downturn, the borrowers refused to refinance the short term loans. This caused the liquidity crisis.
A hedge fund is a private investment fund that charges a performance fee and is typically open to only a limited range of qualified investors.
Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, 55% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, as well as 30% of equity trades.
Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt.
Alfred Winslow Jones is credited with inventing hedge funds in 1949.
In the United States, in order for an investment fund to be exempt from direct regulation, it must be open to accredited investors only and only a limited number of investors can belong to it.
While there is no legal definition of "hedge fund" under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from the types of regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and riskier investments than a public fund might.
Hedge funds managed from other countries have similar relationships with their national regulators. As a hedge fund's investment activities are therefore limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.
As their name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling.
However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.
Hedge funds have acquired a reputation for secrecy. Being outside the regulatory regime that applies to retail funds greatly reduces the information a hedge fund is legally required to make public. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.
The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Their sway over markets, whether they succeed or fail, is therefore potentially substantial and there is a continuing debate over whether they should be more thoroughly regulated.
COMMENT BY TAN KIN LIAN
A big risk in hedge fund is that its investment is "multipled by leverage". They borrowed additional funds at the market rate of interest to increase their investments. During the market downturn, the borrowers refused to refinance the short term loans. This caused the liquidity crisis.
Delay in issuing a policy
Hi Mr. Tan,
Could I seek your advise on this issue. My husband and I went down to one of the Business Centre in NTUC and sign off and make premium payment for Living Benefit policy under the Family Policy.
Yesterday, we received a letter to ask us to go for routine checkup and that NTUC will decide if they will take on the policy with us. Is it right for the insurance company to receive premium payment and then 3 weeks later sent us a letter of such?
What if something happens during this period? After making the premium payment, I thought I am covered under the policy and was shocked when I received the letter yesterday..
REPLY
The coverage will commence on the commencement date shown in the policy. This will be after the acceptance of your application, including medical checkup. In the meantime, the premium is received as an "advance premium" and is refunded in full if the application is rejected.
During my time, NTUC Income offered coverage against accident from the time of payment of the premium until acceptance of the application. I am not sure if this practice is still being continued. You can ask the business center about it.
Normally, there should not be a delay of 3 weeks. It should have been processed much earlier. It must have been an oversight.
What you may lose is the interest on the premium paid for a few days or weeks. As the interest rate is quite low, the lost interest is not significant. If you get accident coverage, it should make up for this lost interest.
Could I seek your advise on this issue. My husband and I went down to one of the Business Centre in NTUC and sign off and make premium payment for Living Benefit policy under the Family Policy.
Yesterday, we received a letter to ask us to go for routine checkup and that NTUC will decide if they will take on the policy with us. Is it right for the insurance company to receive premium payment and then 3 weeks later sent us a letter of such?
What if something happens during this period? After making the premium payment, I thought I am covered under the policy and was shocked when I received the letter yesterday..
REPLY
The coverage will commence on the commencement date shown in the policy. This will be after the acceptance of your application, including medical checkup. In the meantime, the premium is received as an "advance premium" and is refunded in full if the application is rejected.
During my time, NTUC Income offered coverage against accident from the time of payment of the premium until acceptance of the application. I am not sure if this practice is still being continued. You can ask the business center about it.
Normally, there should not be a delay of 3 weeks. It should have been processed much earlier. It must have been an oversight.
What you may lose is the interest on the premium paid for a few days or weeks. As the interest rate is quite low, the lost interest is not significant. If you get accident coverage, it should make up for this lost interest.
6 digit postal code
The 6 digit postal code used in Singapore is organised as follows:
a) A specific code is given to each building or residential block, e.g. 560207 is block 207 in Ang Mo Kio. The individual units are identified by the unit number, e.g. #12-456 for level 12, house 456.
b) Each landed property has a separate 6 digit number, e.g. 8098xx is for xx Begonia Drive.
In my view, it is inefficient to allot a 6 digit number for each house. It is better to allocate a 6 digit code for each street, e.g. Cactus Crescent and to identify each house by the house number. All the houses in the street share the same 6 digit code.
This new method has the following advantages:
a) Reduce the size of the postal code directory by as much as 90% (my estimate)
b) Allows the use of 6 digit postal code and house number for mailing.
A letter can be sent to
Lee Kim Teck
15
Singapore 809001
809001 could be the name of a street, say Begonia Drive.
a) A specific code is given to each building or residential block, e.g. 560207 is block 207 in Ang Mo Kio. The individual units are identified by the unit number, e.g. #12-456 for level 12, house 456.
b) Each landed property has a separate 6 digit number, e.g. 8098xx is for xx Begonia Drive.
In my view, it is inefficient to allot a 6 digit number for each house. It is better to allocate a 6 digit code for each street, e.g. Cactus Crescent and to identify each house by the house number. All the houses in the street share the same 6 digit code.
This new method has the following advantages:
a) Reduce the size of the postal code directory by as much as 90% (my estimate)
b) Allows the use of 6 digit postal code and house number for mailing.
A letter can be sent to
Lee Kim Teck
15
Singapore 809001
809001 could be the name of a street, say Begonia Drive.
Letter with postal code only
I send a letter addressed to the following:
Tan Kin Lian
Singapore 809744
The letter finally arrived after 20 days. The post office searched for my house address and street address, using my postal code, and wrote it on the envelope. This is necessary for the postman to deliver the letter to my house (i.e. the "last mile").
Congratulations to Singapore Post. They did take the trouble!
Tan Kin Lian
Singapore 809744
The letter finally arrived after 20 days. The post office searched for my house address and street address, using my postal code, and wrote it on the envelope. This is necessary for the postman to deliver the letter to my house (i.e. the "last mile").
Congratulations to Singapore Post. They did take the trouble!
Investing in resource and commodity
Hi Mr. Tan,
What is your view about investing in resource and commodity sector? I understand that this sector has appreciated fast during turmoil in the financial market, caused by high price of oil, gold, and other commodities. However, there's also a recent correction, which might give a better opportunity to enter.
What is your view of this sector fund? Currently I am looking at First State Global Resource, which has 1.5% annual management charge, and 1.74% expense ratio. The United Global Resource Fund has 8.63% expense ratio (which I think it's too high).
REPLY
I am not familiar with investing in the resource and commodity sector. I heard the comment of an analyst on CNBC. He said that commodities are bullish now, but investors should be ready to sell at short notice. He reminded investors about what happened on the bursting of the dotcom bubble.
I prefer to invest in a well diversified equity fund.
What is your view about investing in resource and commodity sector? I understand that this sector has appreciated fast during turmoil in the financial market, caused by high price of oil, gold, and other commodities. However, there's also a recent correction, which might give a better opportunity to enter.
What is your view of this sector fund? Currently I am looking at First State Global Resource, which has 1.5% annual management charge, and 1.74% expense ratio. The United Global Resource Fund has 8.63% expense ratio (which I think it's too high).
REPLY
I am not familiar with investing in the resource and commodity sector. I heard the comment of an analyst on CNBC. He said that commodities are bullish now, but investors should be ready to sell at short notice. He reminded investors about what happened on the bursting of the dotcom bubble.
I prefer to invest in a well diversified equity fund.
Investing in hedge funds
Hi Mr Tan,
Hope to seek your advice on my queries:
1) What is a hedge fund?
2) There are many investment portfolios offered by banks, are any of these considered as hedge fund?
3) Can you give an example of a hedge fund?
4) Is it safe to buy investment portfolios offered by banks such as UOB, OCBC?
5) Is it better off buying a long term investment portfolio offered by banks or is it better off buying company's shares directly from a broker? What's your advise? Note that I'm not one person who market watch.
REPLY
I suggest that you search for "Hedge Funds" in Google. You will come across several references in the internet. You can read the articles on hedge funds there.
If you are picking a unit trust offered by a bank, you should look at the initial spread, the annual expense ratio and other factors. Most of these funds have high charges that reduce the return on your investments.
You should avoid investing in an investment that you are not familiar, such as a hedge fund. There are many types of hedge funds. They take money from the investors and borrow additional money (i.e. leveraged) to make risky investments. Many hedge funds performed badly during the past year, as their investments lost money.
I usually advice people to buy a low cost diversified fund, such as the STI ETF, as a long term investment. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Hope to seek your advice on my queries:
1) What is a hedge fund?
2) There are many investment portfolios offered by banks, are any of these considered as hedge fund?
3) Can you give an example of a hedge fund?
4) Is it safe to buy investment portfolios offered by banks such as UOB, OCBC?
5) Is it better off buying a long term investment portfolio offered by banks or is it better off buying company's shares directly from a broker? What's your advise? Note that I'm not one person who market watch.
REPLY
I suggest that you search for "Hedge Funds" in Google. You will come across several references in the internet. You can read the articles on hedge funds there.
If you are picking a unit trust offered by a bank, you should look at the initial spread, the annual expense ratio and other factors. Most of these funds have high charges that reduce the return on your investments.
You should avoid investing in an investment that you are not familiar, such as a hedge fund. There are many types of hedge funds. They take money from the investors and borrow additional money (i.e. leveraged) to make risky investments. Many hedge funds performed badly during the past year, as their investments lost money.
I usually advice people to buy a low cost diversified fund, such as the STI ETF, as a long term investment. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Invest in a life annuity
Dear Mr. Tan,
I am 61 year old. I have around $100,000 to invest. I need your advise on a better investment compared to the low interest rate for fixed deposit.
I am thinking of putting the sum to a deferred anunity with NTUC Income. Am I able to withdraw the full amount from NTUC when I reach 65 years old. What are the likely return I will be getting in 4 year time?
REPLY
I suggest that you call the business center of NTUC Income and ask them about the return on the deferred annuity.
Please read this FAQ
http://www.tankinlian.com/faq/life.html
I am 61 year old. I have around $100,000 to invest. I need your advise on a better investment compared to the low interest rate for fixed deposit.
I am thinking of putting the sum to a deferred anunity with NTUC Income. Am I able to withdraw the full amount from NTUC when I reach 65 years old. What are the likely return I will be getting in 4 year time?
REPLY
I suggest that you call the business center of NTUC Income and ask them about the return on the deferred annuity.
Please read this FAQ
http://www.tankinlian.com/faq/life.html
Poor return on ILP policy
Hi Mr. Tan,
Great to chance upon your website!
I have an issue with my ILP investment. My annual premium is $1200, and I have been paying it for 2 years and eight months, current cash value at only $600.
I'm aware it's too late to cancel the account. Even though my monthly premium is not high, I still don't like the idea of paying for mortality charges.
Do you think it's more worthwhile to cancel now, suffer some loss and start investing in better products for a longer term gain? Does this make sense?
REPLY
As you have paid two years of premium, most of the upfront charges have already been incurred. I suggest that you keep the current investment account.
You can ask the insurance company for the mortality charges for the next five years and compare them with the benchmark rates shown on the attached.
http://www.tankinlian.com/faq/benchmark.html
If the mortality charges are too high, you can cancel the life insurance cover and buy a term insurance policy. You can still keep the investments.
If the mortality charges are reasonable, you can continue the policy for the next 5 to 10 years. You can cancel it when you reach age 60 or 65.
Great to chance upon your website!
I have an issue with my ILP investment. My annual premium is $1200, and I have been paying it for 2 years and eight months, current cash value at only $600.
I'm aware it's too late to cancel the account. Even though my monthly premium is not high, I still don't like the idea of paying for mortality charges.
Do you think it's more worthwhile to cancel now, suffer some loss and start investing in better products for a longer term gain? Does this make sense?
REPLY
As you have paid two years of premium, most of the upfront charges have already been incurred. I suggest that you keep the current investment account.
You can ask the insurance company for the mortality charges for the next five years and compare them with the benchmark rates shown on the attached.
http://www.tankinlian.com/faq/benchmark.html
If the mortality charges are too high, you can cancel the life insurance cover and buy a term insurance policy. You can still keep the investments.
If the mortality charges are reasonable, you can continue the policy for the next 5 to 10 years. You can cancel it when you reach age 60 or 65.
Public Tender
Singapore is used to the public tender system. The business is awarded to the tenderer who submitted the most competitive (lowest) bid. In some cases, the tenderer have to bid below cost, to win the tender. They find ways to cut corners to meet the low budget, leading to a poor quality of work.
Someone observed that the public tender system favours the large companies. They have the financial resources to spend money to submit the bid. The smaller companies are not able to compete.
I hope that there is another way for the principal to offer a reasonable price, and select the contractor based on their ability to deliver a better quality of work.
Someone observed that the public tender system favours the large companies. They have the financial resources to spend money to submit the bid. The smaller companies are not able to compete.
I hope that there is another way for the principal to offer a reasonable price, and select the contractor based on their ability to deliver a better quality of work.
Walkways in Hong Kong
My friend worked in Hong Kong a few years back. When he arrived in Hong Kong, he was provided with a car. After two months, he sold off the car. He preferred to use the Hong Kong MTR (Mass Transit Railway).
It was possible to walk to a nearby MTR station from most parts of Hong Kong. He could walk through the underground or overhead walkways. It was quite comfortable during most months of the year, due to the congenial weather.
He observed that many people in Hong Kong and Japan were quite slim. The walking is good for their health and keep them fit.
I hope that all MRT stations in Singapore have underground or overlink walkways. If commuters can walk in these sheltered walkway at a different level from the road traffic, more people will be willing to take the train. This has been proven by the Hong Kong experience.
It was possible to walk to a nearby MTR station from most parts of Hong Kong. He could walk through the underground or overhead walkways. It was quite comfortable during most months of the year, due to the congenial weather.
He observed that many people in Hong Kong and Japan were quite slim. The walking is good for their health and keep them fit.
I hope that all MRT stations in Singapore have underground or overlink walkways. If commuters can walk in these sheltered walkway at a different level from the road traffic, more people will be willing to take the train. This has been proven by the Hong Kong experience.
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