WhereDoesAllMyMoneyGo.com

The Alphabet Soup of Financial Advisor Designations

Preet — Tue, 17 Nov 2009 02:25:12 +0000

I’ve compiled a list of 20 of the most common financial advisor designations and thrown them into a navigable mind map. Just click on a designation to see what it stands for. When you want to zoom back out, just click on some white-space around the objects (as far to the edges of the window as you can).

NOTE:

To use the map, first click on the “play” button to activate it. To make it easier to see, I recommend switching to the full screen mode which can be accessed under the “MORE” option on the bottom right.

If anyone has suggestions for other designations to add, just let me know and I’ll add them to the map. I plan on updating this with more detailed information in stages such as: brief study description, cost of program, and general description of the benefits of each designation.

Enjoy!

The High Frequency Trading Arms Race

Preet — Fri, 13 Nov 2009 03:21:03 +0000

The High Frequency Trading (HFT) Arms Race is a term that has been bandied about lately. This refers to the insatiable consumption of the latest technology in trading infrastructure for HFT firms in order to stay ahead of the competition. One of the main advantages of an HFT firm is the speed at which they can access the market, and milliseconds can be worth hundreds of millions of dollars. The infrastructure refers to the speeds of the computers, the speed of the data connection, and the speeds of the disk drives and so on.

A friend of mine on Bay street was telling me about an HFT outfit who was in town recently looking at renting/buying property as close to the exchange as possible in order to move their equipment. Once all the firms have the same technology, then they really only compete on two other major factors: their specific trading algorithms and the distance from the exchange. Being 100 metres closer to the exchange means data has less distance to travel and trades can be executed even faster.

There have been calls for imposing some kind of restriction on HFT infrastructure, either in the form of allowed equipment of instituting some kind of built in latency which will effectively render faster access useless. Others have also called for a ban on flash orders (the ability to pay to see orders in the market before everyone else). It remains to be seen what will come of all this, but industry expert Rick Bookstaber pointed out a while ago that this arms race, like all arms races, leaves everyone at the same relative position… only poorer on an absolute basis.

High Frequency Trading Explained

Preet — Thu, 12 Nov 2009 03:35:56 +0000

2009 has seen much coverage in the media on High Frequency Trading (HFT), but I find that many people are still not sure what it is or how it works, and whether or not it is good or bad. So let’s take a closer look.

High Frequency Trading

The general description of HFT is the buying and selling of securities at lightning fast speeds, which are facilitated by computers running on pre-programmed algorithms. Programs are out there that take inputs and parameters from programmers to look for specific patterns or situations and then immediately execute a trading strategy based on the HFT firm’s proprietary models.

An Example of an HFT Strategy

This is only one type of HFT strategy, there are other which are based on news releases, or technical trading signals.

Let’s pretend that a mutual fund manager wants to buy 100,000 shares of XYZ which is trading at $10.00/share. The manager has determined that they do not want to pay more than $10.20/share and therefore places a limit order of $10.20/share. Some exchanges provide HFT firms with the ability to see new market orders before everyone else for a fee, but only by milliseconds at a time. So our HFT firm will see that there has been a flood of demand for XYZ stock and will start trying to figure out the limit price, after having bought up some XYZ stock. So for example, it will buy 100,000 shares of XYZ at $10.00/share and then start issuing small sell orders at specific prices. For example, it would start selling small positions at $10.50 which might get rejected because this is above the limit price set by the fund manager. It might then send a small order for $10.25/share, which would also get rejected. It would then send a small order for $10.13 which would get filled. It might continue to send small orders until it figures out that the limit price is at $10.20/share and then flood the market with a large order at $10.20/share.

This is a fictitious example designed to illustrate how HFT could work, and all of this could happen in less than a second. Profits per share are measured in pennies but the high volume of trading means that HFT firms can make big bucks. According to the TABB Group, HFT firms represent only 2% of the trading firms in the US, but 70% of the trading volume. I’ve mentioned before that the algorithms behind the Renaissance Technologies Medallion Hedge Fund are rumoured to be responsible for 10% of the NASDAQ trading volume alone. The TABB Group report estimates that over $21 billion in profits were earned by HFT firms in the US in 2008.

We’ll look at it some more in future posts…

What Is A Mutual Fund?

Preet — Mon, 09 Nov 2009 04:53:46 +0000

This is a quick four-minute video that I put together to explain the very basics of a mutual fund and how it works. Feel free to share it with anyone you think might like it.

Note: you can click on the bottom right of the video to blow it up to a full-screen view. Enjoy! Feedback welcome in the comments section below.

What Is A Mutual Fund? from Preet Banerjee on Vimeo.

A Lap Of The Blogs

Preet — Thu, 05 Nov 2009 23:16:39 +0000

If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also sometimes include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. NOTE: you have to visit the actual website to see the embedded video – it may not appear in your email. Just click on the title of the email to see it…

You’ve probably noticed there haven’t been any posts this week – nothing dramatic to report, just busy with work and I felt I wasn’t getting enough sleep so the blog had to take a back seat this week. I’ll get back to regularly scheduled programming in the next week or so. Thanks for your patience!

From Around The Blogosphere

Larry MacDonald writes about Charles Schwab’s new ETFs which have MERs comparable to Vanguard and are available for purchase without commissions for Schwab account holders. If I were a betting man, I would imagine BMO would be looking at this option for their new ETF line-up as well – since they aren’t attracting much in the way of assets as far as I can tell.

Jonathan Chevreau covers the new Ontario push for financial literacy in school. Better late than never I suppose.

Rob Carrick writes about the same issue here.

Ellen Roseman writes about big companies behaving badly.

Canadian Capitalist discusses the Globe’s discount broker survey for 2009.

Million Dollar Journey explains that Canadians don’t use coupons as much as they could.

Four Pillars answers a reader’s question about a strategy using margin.

Michael James on Money wonders if you really can profit from “the end of oil”?

Big Cajun Man explains the RDSP (Registered Disability Savings Plan) account for Canadians.

Thicken My Wallet talks about the meaning we can infer from Buffett buying railways and India buying gold this week.

No video this week, but have a great weekend everyone!

A Lap Of The Blogs

Preet — Fri, 30 Oct 2009 03:30:41 +0000

Thanks to everyone who contacted the production company to apply for the pilot of the TV show, a few people had asked about the potential for non-couples/families to apply and it looks like they will be looking at individuals if a show ends up being put to series. I was in earlier this week for some test shooting and I found out the show will be filmed in high-def. Guess I better get some wrinkle cream or something…

From Around The Blogosphere

Jonathan Chevreau writes: Why the insurance industry doesn’t see a need for pension reform.

Rob Carrick writes about income trusts with a future.

Ellen Roseman asks if your furnace needs to be replaced.

Canadian Capitalist explains the future cost of going to university could be over $90,000 for an undergraduate degree.

Million Dollar Journey has some tips for dealing with collection agencies.

Four Pillars notes that the money-back guarantee has become very common, and there could be too many loopholes. He suggests a workaround…

Michael James on Money why investing is different than many other endeavours.

Big Cajun Man has a great post equating debt to fat. Very interesting analogy.

Thicken My Wallet asks: how effective are dividend paying stocks in a downturn?

This Week’s Racing Video

Oh, it’s a beauty. This is an onboard lap of a legendary car, the Nissan R90CK, qualifying for the 24 hours of Le Mans. What is particularly interesting is that there was a problem with the car’s turbocharger (the wastegate was stuck) which resulted in the developing more power than what was intended. In fact it is estimated that it was running at about 1,100hp – a ticking time bomb. It propelled Mark Blundell to 366km/h on the straightaways. Fast forward to 2:20 in the video to catch the start of the flying lap – it’s amazing!

Sovereign Wealth Funds

Preet — Wed, 28 Oct 2009 02:58:41 +0000

You’ve heard of mutual funds, hedge funds and pension funds, but have you heard of Sovereign Wealth Funds? It may be surprising to find out that sovereign wealth funds (SWFs for short) are projected to have over $10 trillion in assets by 2012.

What is a Sovereign Wealth Fund?

A sovereign wealth fund is essentially an investment fund set up by a government for the purpose of long term investment of surplus funds. Not all governments have SWFs, because as you may have noticed as of late, not all governments have surpluses. For example, the only Canadian provincial government with an SWF is Alberta – owing to it’s royalties on natural resources which have been a cash cow for that province.

The top three SWFs worldwide have assets of roughly $1.5 trillion – originating from oil royalties and revenues.

What Do They Invest In?

Anything they please.

What Are The Investment Management Costs?

We’re dealing with some of the largest investment funds in the world so of course they are going to get institutional investment management pricing which is lower than retail pricing (what you and I pay), and it is much more negotiable too, meaning they will pay on the low end of institutional rates. For example, the Alberta Heritage Savings Trust Fund which has total assets of about $14 billion paid an expense ratio of 0.09% in 2008. This covers investment management into the following areas: stocks, bonds, real estate, private equity, and hedge funds.

For a deeper look inside an SWF, click here to view the Alberta Heritage Savings Trust Fund. I should point out that the investment manager (AIMCo – Alberta Investment Management Company) is looking for a new CIO (Chief Investment Officer)…

ETFs with Few Holdings… What’s the point?

Preet — Tue, 27 Oct 2009 01:14:13 +0000

Jonathan Chevreau notes on his Wealth Boomer blog that BMO has launched 8 new ETFs to complement the 4 they launched earlier this year. I took a look at the new kids on the block and immediately I gravitated towards ZEB.to which seeks to track the S&P/TSX Equal Weight Diversified Banks Index. This ETF has an MER of 0.55% and it holds only six stocks in equal positions: BMO, CIBC, Royal Bank, Scotia, TD and National Bank.

As Norm Rothery pointed out in a Wealthy Boomer video interview, with the advent of discount brokerages you might be better off buying the underlying stocks yourself. For example, suppose you had $100,000 to invest in this strategy. You could either spend $10 per order x 6 orders = $60 to buy an equal weight starting allocation to these six stocks, or you could pay $10 for one order of the ETF. If we assume that this basket of stocks grows at a compounded rate of 8% for 10 years, the MER would’ve taken roughly another $8,000 from your portfolio in fees.

So on one hand, we have $60 to execute this strategy versus about $8,000.

Some may argue that there are benefits to rebalancing to consider. Fine – take the dividends as cash and once per year put the accumulated cash into the worst performing bank stock. This adds $10 per year for a total of $150 instead of $60.

Still not satisfied? Even if you fully rebalanced to an equal weight on a quarterly basis (which I think most would agree is excessive) the ETF would be more than 10 times more expensive than just buying the underlying holdings.

I think narrow ETFs for the most part might only be useful for market timers looking for specific sector beta for short periods of a time. (Beta means market exposure, essentially.)

For those of you who are interested, here is Jon’s interview with Norm Rothery in which they talk about how $10 trades was a game-changer. Note, they also talk about the disadvantage of cheap trades, too.

Commodity Trading Advisors

Preet — Mon, 26 Oct 2009 01:40:45 +0000

I wrote a little bit recently on Managed Futures and there seemed to be a fair amount of interest from readers in learning a little bit more so today I’m going to introduce the concept of CTAs – Commodity Trading Advisors.

What Is A Commodity Trading Advisor?

A CTA is a US-specific registration for advisors or firms who provide advice or management on portfolios using derivative instruments (futures, forwards, options). An advisor or firm may advise or execute derivatives trading without being registered as a CTA if they deal with less than 15 clients or only very rarely use these types of securities.

CTAs generally use one of three trading styles: 1) Systematic (Blackbox), 2) Non-Systematic (Discretionary) or 3) a blend of the two.

Systematic Approach

This is the most common type of CTA program and the trading is automated to varying degrees. Technical analysis is used heavily along with other variables which serve as inputs into proprietary trading models which then provide outputs to determine trading. As such, they are often referred to as, or perceived to be, blackboxes.

Non-Systematic Approach

The non-systematic approach is also referred to as discretionary trading. For the most part, these CTAs rely on experience and personal judgment. Perhaps this should be referred to as more black art if systematic CTAs are regarded as blackbox?

The next time I write on Managed Futures, I’ll get into the main systematic CTA program: trend-following.

A Lap Of The Blogs

Preet — Fri, 23 Oct 2009 01:15:44 +0000

I had a chance to take out the kart again last weekend, but I made the mistake of not wearing the rib-protector for one stint. It felt like I almost broke ribs on both sides when I hit a particular bump on the track. For those of you who don’t know, this kart does well over 100km/h and there’s no suspension. It is a wild, wild ride – and I highly recommend it!

From Around The Blogosphere

Don’t forget about the casting call for the W Network pilot I’ll be shooting. You can read the casting notice here, but to cut to the chase: send an email to casting@generalpurposepictures.com.

The Canadian Capitalist recently had to help settle a loved one’s estate and shares some valuable advice from his experience.

Million Dollar Journey has some tips for buying and selling on Kijiji and Craig’s list.

Four Pillars has a great post on how to work best with computer nerds. This is a brilliant post, IMHO – well worth checking out, and well worth the time.

Michael James on Money explains that the recent proposed changes to the TFSA may actually protect investors (from themselves).

Big Cajun Man has posted one of the greatest National Film Board of Canada videos in history on his site. “The Sweater” recounts the tale of a young boy in Quebec who was mistakenly sent a Toronto Maple Leafs jersey from Eaton’s in the 1940’s.

Last and certainly not least, Thicken My Wallet has a fantastic post which asks what we would do in a world without financial advisors.

This Week’s Racing Video

Racing drivers are always in search of “the perfect lap”. It never happens, you are never 100% satisfied – or at least you always feel you could’ve done just a bit better when you think back on it. Part of the reason is that when you are really “on it” the car is dancing on a knife’s edge constantly, it is in a constant state of almost snapping out from under you. Luckily, even though we may never get to that perfect lap, sometimes you are in the zone and everything is just working. Getting a lap that is 98% perfect is enough to blow away the competition (assuming the cars are equal). This video is Australian V8 Supercar driver Greg Murphy during qualifying and he is just on fire. Enjoy!