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We are pleased to announce a significant milestone for GMG Group Limited! Our subsidiary, GMG Europe B.V. regulated by the AFM, has successfully secured an Organised Trading Facility (OTF) license.

This achievement signifies a pivotal moment in our European operations, establishing GMG Europe B.V. as an OTF venue and underscoring our commitment to progress and exceptional client service.

The acquisition of the OTF license empowers GMG Europe B.V. to enhance transparency and integrity in the services provided to our esteemed clients. We reaffirm our unwavering commitment to complying with the stringent regulatory standards mandated by European authorities, ensuring a secure and dependable trading environment.

Since our inception 15 years ago, GMG has transitioned from an interdealer broker with offices in London, GMG Brokers Limited regulated by the FCA and Dubai, GMG (Dubai) Limited regulated by the DFSA, to today acquiring our OTF license in Europe. This places GMG among the most reputable investment firms in the market. This milestone heralds a new chapter for GMG. Committed to providing exceptional services and empowering our clients, we look forward to the exciting possibilities on the horizon.

We extend our heartfelt appreciation to our clients, partners and our team members for their unwavering dedication and support. Your trust and collaboration have been instrumental in our success.

We warmly welcome you to join us on this exciting journey as we step into a new chapter at GMG. Together, we will persist in our pursuit of excellence and embrace numerous opportunities for advancement.

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We, GMG Europe BV, Amsterdam are delighted to share the news of our successful acceptance as a non-trading broker member of the EEX Exchange. Our membership code is GMGEX.

GMG Europe B.V. is a wholly owned subsidiary of GMG Group Limited, Guernsey. We are regulated by the AFM (Autoriteit Financiële Markten), the Dutch financial markets authority as a class 3 investment firm.

Our primary objective is to leverage our expertise, efficient execution capabilities, and top-notch customer service in support of our growing client base throughout Europe, directly from our Amsterdam office. In doing so, we are excited to expand our service offerings to include the Commodity Asset Class.

In the Power sector, we are committed to maximizing value and customer satisfaction in the core and specialized regions of Europe. Additionally, we intend to broaden our presence by venturing into Fuels and other Commodity products, seizing opportunities as they arise.

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There are few things more important and more daunting than creating a long-term investment strategy that can enable an individual to invest with confidence and with clarity about their future. Constructing an investment portfolio requires a deliberate and precise portfolio-planning process that follows five essential steps.

KEY TAKEAWAYS

In order to plan for the future, first take a cold, hard look at the present, sifting through all current assets, investments, and any debt; then, define your financial goals for the short- and long-term.

Figure out how much risk and volatility you’re willing to take on, and what returns you want to generate; with a risk-return profile established, benchmarks can be set in place to track portfolio performance.

With a risk-return profile in place, next create an asset allocation strategy that is both diversified and structured for maximum returns; adjust the strategy to account for big life changes, like buying a home or retiring.

Choose whether you want active management, which might include professionally managed mutual funds, or passive management, which might include ETFs that track specific indexes.

Once a portfolio is in place, it’s important to monitor the investment and ideally reassess goals annually, making changes as needed.

Step 1: Assess the Current Situation

Planning for the future requires having a clear understanding of an investor’s current situation in relation to where they want to be. That requires a thorough assessment of current assets, liabilities, cash flow, and investments in light of the investor’s most important goals. Goals need to be clearly defined and quantified so that the assessment can identify any gaps between the current investment strategy and the stated goals. This step needs to include a frank discussion about the investor’s values, beliefs, and priorities, all of which set the course for developing an investment strategy.

 Portfolio planning is not a one-and-done deal—it requires ongoing assessments and adjustments as you go through different stages of life.

Step 2: Establish Investment Objectives

Establishing investment objectives centers on identifying the investor’s risk-return profile. Determining how much risk an investor is willing and able to assume, and how much volatility the investor can withstand, is key to formulating a portfolio strategy that can deliver the required returns with an acceptable level of risk. Once an acceptable risk-return profile is developed, benchmarks can be established for tracking the portfolio’s performance. Tracking the portfolio’s performance against benchmarks allows smaller adjustments to be made along the way.

Step 3: Determine Asset Allocation

Using the risk-return profile, an investor can develop an asset allocation strategy. Selecting from various asset classes and investment options, the investor can allocate assets in a way that achieves optimum diversification while targeting the expected returns. The investor can also assign percentages to various asset classes, including stocks, bonds, cash, and alternative investments, based on an acceptable range of volatility for the portfolio. The asset allocation strategy is based on a snapshot of the investor’s current situation and goals and is usually adjusted as life changes occur. For example, the closer an investor gets to their retirement target date, the more the allocation may change to reflect less tolerance for volatility and risk.

Your risk-reward profile will change over the years, tilting further away from risk the closer you get to retirement.

Step 4: Select Investment Options

Individual investments are selected based on the parameters of the asset allocation strategy. The specific investment type selected depends in large part on the investor’s preference for active or passive management. An actively managed portfolio might include individual stocks and bonds if there are sufficient assets to achieve optimum diversification, which is typically over $1 million in assets. Smaller portfolios can achieve the proper diversification through professionally managed funds, such as mutual funds or exchange-traded funds. An investor might construct a passively managed portfolio with index funds selected from the various asset classes and economic sectors.

Step 5: Monitor, Measure, and Rebalance

After implementing a portfolio plan, the management process begins. This includes monitoring the investments and measuring the portfolio’s performance relative to the benchmarks. It is necessary to report investment performance at regular intervals, typically quarterly, and to review the portfolio plan annually. Once a year, the investor’s situation and goals get a review to determine if there have been any significant changes. The portfolio review then determines if the allocation is still on target to track the investor’s risk-reward profile. If it is not, then the portfolio can be rebalanced, selling investments that have reached their targets, and buying investments that offer greater upside potential.

When investing for lifelong goals, the portfolio planning process never stops. As investors move through their life stages, changes may occur, such as job changes, births, divorce, deaths, or shrinking time horizons, which may require adjustments to their goals, risk-reward profiles or asset allocations. As changes occur, or as market or economic conditions dictate, the portfolio planning process begins anew, following each of the five steps to ensure that the right investment strategy is in place.

By RICHARD BEST

Updated October 29, 2022

Reviewed by PAMELA RODRIGUEZ

Fact checked by VIKKI VELASQUEZ

Source : https://www.investopedia.com/articles/company-insights/083116/portfolio-planning-process-step-step.asp

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Investment Adviser vs. Broker: An Overview

Although their jobs might seem similar to an outsider, investment advisers and brokers perform very different roles in financial services. Below, we highlight the similarities and differences between the investment adviser (also called the financial adviser) and the broker.

KEY TAKEAWAYS

Investment advisers are paid a flat fee or percentage of AUM to advise clients on securities and/or manage portfolios.

Brokers are paid commissions to execute trades or buy and sell assets for clients.

Brokers and investment advisers are regulated by different bodies and require different qualifications for practice (e.g., FINRA regulates brokers and the SEC regulates investment advisers).

Both professionals are legally prohibited from giving advice that conflicts with their clients’ needs.

Brokers

Before online trading, accessing a broker was traditionally a luxury reserved for the rich. Individual investors had very little or no direct access to the market and had to place their orders through a licensed broker (usually by phone). In return, brokers charged very high commissions. However, the advent of web-based discount brokerages has changed the job of the broker.

Now, individuals who wish to trade on the stock market no longer require a broker on standby to execute their buy and sell orders and can have direct access online for zero commissions. Although brokers still execute orders, many have expanded their services to personalized investment management to justify charging higher commissions.

These days, it’s not uncommon to see brokers dual-registered as investment advisers. Brokers may also be involved heavily as part of a sales team in private placements, initial public offerings (IPOs), or secondary issuances. Working alongside their firm’s corporate finance departments, brokers may work to sell their clients on a hot new issuance or private deal to help a company raise capital. In return, the broker may receive a commission, shares, or warrants in the issuing company.

Investment Advisers

Investment advisers, on the other hand, work on a fee-based system of dispensing investment advice catered towards individual client needs and oftentimes, manage investment accounts. For example, an investment adviser may work with a client to create an entire wealth management framework, including assisting the clients through tax, estate, and mortgage planning. Not to be confused with a financial adviser, investment advisers are registered with and regulated by the Securities and Exchange Commission (SEC) and or a state regulatory body. Investment advisers are also known as asset managers, investment managers, and wealth managers.

Key Differences in Regulations

Investment advisers are also held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the Investment Advisers Act of 1940, which calls on advisers to perform fiduciary duties in regards to their clients’ accounts.

Fiduciary duty, which is legally enforceable under the Advisers Act Sections 206 (1)/(2), prohibits advisers from “employ[ing] any device, scheme or artifice to defraud any client or prospective client.”

The standard also imposes upon the adviser the “affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts” as part of the adviser’s duty to exercise loyalty and care. This includes “an obligation not to subordinate the clients’ interests to its own.” Due to the importance of this fiduciary conduct, most investment advisers can make investment decisions for their clients without first getting the client’s permission.

Prior to 2011, all investment advisers with $30 million or more assets under management (AUM) had to register with the U.S. Securities and Exchange Commission (SEC), while advisers with less than $25 million needed only to register with their state regulatory body. In 2011, the Dodd-Frank Act increased the minimum assets under management for SEC registration to $110 million.

Brokers, as defined broadly by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others” (which may also include investment advisers), must register with the SEC and a self-regulatory organization. The most well-known broker self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).

Key Differences in Testing and Licensing

Investment advisers and brokers also have different training and licensing requirements. Brokers have to pass the Series 7, otherwise known as the General Securities Representative Exam; the Series 7 also acts as a precursor to further exams in the securities industry. On the other hand, future investment advisers must pass the Series 65 exam, which is a requirement before they can dispense financial advice for a fee.

An additional distinction between the Series 7 and the Series 65 is that only the Series 7 requires an individual to be sponsored by a firm prior to enrolling for the test. The Series 65 is also often used by certified public accountants (CPAs) to enter the investment advisory business. Unlike chartered financial analysts (CFAs) and certified financial planners (CFPs), the CPA designation does not meet the prerequisites to have the Series 65 exam waived.

By ZAW THIHA TUN Updated August 29, 2021

Reviewed by CHARLENE RHINEHART

Fact checked by KIRSTEN ROHRS SCHMITT

Source : https://www.investopedia.com/articles/investing/071515/investment-advisor-versus-broker-how-they-compare.asp

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Interest rate risk exists in an interest-bearing asset, such as a loan or a bond, due to the possibility of a change in the asset’s value resulting from the variability of interest rates. Interest rate risk management has become very important, and assorted instruments have been developed to deal with interest rate risk.

This article looks at several ways that both businesses and consumers manage interest rate risk using various interest rate derivative instruments.

KEY TAKEAWAYS

Interest rate risk is the risk associated with interest rate fluctuations in assets.

Interest rates and bond prices are inversely related.

Certain products and options, such as forward and futures contracts, help investors hedge interest rate risks.

Forward contracts are agreements in which a party can purchase or sell assets at a certain price on a specific future date.

Which Investors Are Susceptible to Interest Rate Risk?

Interest rate risk is the risk that arises when the absolute level of interest rates fluctuates. Interest rate risk directly affects the values of fixed-income securities. Since interest rates and bond prices are inversely related, the risk associated with a rise in interest rates causes bond prices to fall, and vice versa. Bond investors, specifically those who invest in long-term fixed-rate bonds, are more directly susceptible to interest rate risk.

Suppose an individual purchases a 3% fixed-rate 30-year bond for $10,000. This bond pays $300 per year through maturity. If during this time, interest rates rise to 3.5%, new bonds issued pay $350 per year through maturity, assuming a $10,000 investment. If the 3% bondholder continues to hold their bond through maturity, they lose out on the opportunity to earn a higher interest rate.

Alternatively, they could sell their 3% bond in the market and buy the bond with the higher interest rate; however, doing so results in the investor getting a lower price on their sale of 3% bonds as they are no longer as attractive to investors since the newly issued 3.5% bonds are also available.

In contrast, changes in interest rates also affect equity investors but less directly than bond investors. This is because, for example, when interest rates rise, the corporation’s cost of borrowing money also increases.

This could result in the corporation postponing borrowing, which may result in less spending. This decrease in spending may slow down corporate growth and result in decreased profit and ultimately lower stock prices for investors.

Interest Rate Risk Should Not Be Ignored

As with any risk-management assessment, there is always the option to do nothing, and that is what many people do; however, in circumstances of unpredictability, sometimes not hedging is disastrous. Yes, there is a cost to hedging, but what is the cost of a major move in the wrong direction?

One need only look to Orange County, California, in 1994 to see evidence of the pitfalls of ignoring the threat of interest rate risk. In a nutshell, Orange County Treasurer Robert Citron borrowed money at lower short-term rates and lent money at higher long-term rates. The strategy was initially great as short-term rates fell and the normal yield curve was maintained.

But when the curve began to turn and approach inverted yield curve status, things changed. Losses to Orange County and the almost 200 public entities for which Citron managed money were estimated at nearly $1.7 billion and resulted in the municipality’s bankruptcy. That’s a hefty price to pay for ignoring interest rate risk.

Investment Products

Those who want to hedge their investments against interest rate risk have many products to choose from.

Forwards

A forward contract is the most basic interest rate management product. The idea is simple, and many other products discussed in this article are based on this idea of an agreement today for an exchange of something at a specific future date.

Forward Rate Agreements (FRAs)

A Forward Rate Agreement (FRA) is based on the idea of a forward contract, where the determinant of gain or loss is an interest rate. Under this agreement, one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate. The actual payments are calculated based on a notional principal amount and paid at intervals determined by the parties. Only a net payment is made—the loser pays the winner, so to speak. FRAs are always settled in cash.

FRA users are typically borrowers or lenders with a single future date on which they are exposed to interest rate risk. A series of FRAs is similar to a swap (discussed below); however, in a swap, all payments are at the same rate. Each FRA in a series is priced at a different rate unless the term structure is flat.

Futures

A futures contract is similar to a forward, but it provides the counterparties with less risk than a forward contract—namely, a lessening of default and liquidity risk due to the inclusion of an intermediary.

Swaps

Just like it sounds, a swap is an exchange. More specifically, an interest rate swap looks a lot like a combination of FRAs and involves an agreement between counterparties to exchange sets of future cash flows. The most common type of interest rate swap is a plain vanilla swap, which involves one party paying a fixed interest rate and receiving a floating rate, and the other party paying a floating rate and receiving a fixed rate.

Diversification is one method to hedge against interest rate risk.

Options

Interest rate management options are option contracts for which the underlying security is a debt obligation. These instruments are useful in protecting the parties involved in a floating-rate loan, such as adjustable-rate mortgages (ARMs). A grouping of interest rate call options is referred to as an interest rate cap; a combination of interest rate put options is referred to as an interest rate floor. In general, a cap is like a call, and a floor is like a put.

Swaptions

A swaption, or swap option, is simply an option to enter into a swap.

Embedded Options

Many investors encounter interest management derivative instruments via embedded options. If you have ever bought a bond with a call provision, you too are in the club. The issuer of your callable bond is insuring that if interest rates decline, they can call in your bond and issue new bonds with a lower coupon.

Caps

A cap, also called a ceiling, is a call option on an interest rate. An example of its application would be a borrower going long, or paying a premium to buy a cap and receiving cash payments from the cap seller (the short) when the reference interest rate exceeds the cap’s strike rate. The payments are designed to offset interest rate increases on a floating-rate loan.

If the actual interest rate exceeds the strike rate, the seller pays the difference between the strike and the interest rate multiplied by the notional principal. This option will “cap,” or place an upper limit, on the holder’s interest expense.

The interest rate cap is a series of component options, or “caplets,” for each period the cap agreement exists. A caplet is designed to provide a hedge against a rise in the benchmark interest rate, such as the Secured Overnight Financing Rate (SOFR), for a stated period.

Floors

Just as a put option is considered the mirror image of a call option, the floor is the mirror image of the cap. The interest rate floor, like the cap, is a series of component options, except that they are put options and the series components are referred to as “floorlets.” Whoever is long, the floor is paid upon maturity of the floorlets if the reference rate is below the floor’s strike price. A lender uses this to protect against falling rates on an outstanding floating-rate loan.

Collars

A protective collar can also help manage interest rate risk. Collaring is accomplished by simultaneously buying a cap and selling a floor (or vice versa), just like a collar protects an investor who is long on a stock. A zero-cost collar can also be established to lower the cost of hedging, but this lessens the potential profit that would be enjoyed by an interest rate movement in your favor as you have placed a ceiling on your potential profit.

What Causes Interest Rate Risk?

Interest rate risk is the decline in the interest rate of an asset, which would return less to an investor and is primarily a concern with fixed-income products. Declining interest rates cause interest rate risk and are a larger concern for products with longer maturities.

Is Interest Rate Risk a Market Risk?

Yes, interest rate risk is a market risk. Interest rates in an economy can change and thereby impact the interest rate on fixed-income securities. The risk is that the interest paid on a fixed-income security will decrease and the payout to the investor will be smaller.

What Happens When Interest Rates Rise?

When interest rates rise, the cost of borrowing money becomes more expensive. This causes consumers to buy less as the cost of goods, such as a home or car, becomes more costly. When consumers buy less, demand decreases; when demand decreases, companies eventually decrease the supply of goods and services. They produce less, which means hiring fewer people or even letting go of some employees, which causes consumers to spend even less, further strengthening the cycle. The overall increase in interest rates results in a slowdown of the economy.

The Bottom Line

Each of the products discussed above provides a way to hedge interest rate risk, with different products more appropriate for different scenarios. There is, however, no free lunch. With any of these alternatives, one gives up something: either money, like premiums paid for options, or opportunity cost, which is the profit one would have made without hedging.

By EMILY NORRIS Updated August 25, 2023

Reviewed by MICHAEL J BOYLE

Michael Boyle

Reviewed by Michael J Boyle

Fact checked by KATRINA MUNICHIELLO

Source : https://www.investopedia.com/articles/optioninvestor/08/manage-interest-rate-risk.asp

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It’s true – there are no guarantees with investing, but not everything in a portfolio moves in the same direction at the same time. If it does, you need to diversify.

Non-correlated assets are an essential part of effective diversification, generating better returns and protecting your clients’ portfolios from nasty shocks. They enable clients to reap the benefits of investments that perform well, while lessening the impact of those that don’t.

So if you want to optimise your clients’ portfolio balance, here’s what you need to know.

1. Adjusting the safety net – correlation and non-correlation

While past performance isn’t a reliable guide to the future, correlation is still a useful metric. It works on a scale with assets holding a plus or minus score. A score of +1 shows perfect positive correlation – two assets moving completely in step, while -1 represents perfect negative correlation – they move in opposite directions all the time.

A score of zero, meanwhile, means the assets are non-correlated, having no effect on one another. These are the ones that provide investment portfolios with a safety net.

Of course, it’s not as binary as that. Values are influenced by many different factors, so perfect correlation, or no correlation at all, is extremely rare. For example, gold traditionally shows low correlation with equities (which is why people ‘go to gold’) – it won’t be completely without correlation, but for the macroeconomic outlook the effect is small.

Achieve better diversification through non-correlation

Diversification is a pillar of investment, but it’s easy to get lazy. The ‘classic’ 60:40 portfolio has been the ‘smart blue blazer’ of investing for decades – it works for all occasions. But in recent years it has come under fire for being out of step with the times.

As investment professionals, we need to look beyond the obvious and read the landscape in which we’re operating. Focusing on investments that aren’t tied to current markets and looking to alternative investments gives clients a greater breadth of exposure and a better chance of riding out periods of volatility. Blending direct, traditional investments like real estate or stocks, with non-correlated assets such as life insurance and litigation finance builds a diverse portfolio with reduced risk and higher potential returns.

Blending direct, traditional investments like real estate or stocks, with non-correlated assets such as life insurance and litigation finance builds a diverse portfolio with reduced risk and higher potential returns.

2. Improving the overall risk and return ratio

Harry Markowitz’s 1952 essay Portfolio Selection laid the groundwork for Modern Portfolio Theory. In it he noted:

‘A portfolio with sixty different railway securities… would not be as well diversified as the same size portfolio with some railroad, some public utility, mining, various sort of manufacturing, etc.’

The paper goes on to argue that when a range of uncorrelated assets are put together, overall returns are improved and risk is lowered. The risk associated with individual investments doesn’t matter as much as ensuring that the risk is different to that of other holdings.

A robust portfolio needs a mix of complementary assets. If built from low- or non-correlated assets it won’t always produce gains, but it will allow investors exposure to the assets that perform well, while dulling the pain of those that don’t.

Take an intelligent approach to risk

Risk isn’t black and white. A straight-up low-risk portfolio might give safe but unsatisfactory returns, while a high-growth stocks portfolio could end badly. But a portfolio that invests in low and/or non-correlated assets builds a three-dimensional picture. As Charles Rotblut noted in his 2010 article The Benefits of Modern Portfolio Theory:

‘This moves the portfolio closer to the efficient market frontier by enabling it to benefit from several market forces instead of just one or two’.

Investment strategies with non-correlated assets that behave differently from stocks and bonds won’t rid your clients of risk. They will, however, spread it more intelligently.

Investment strategies with non-correlated assets that behave differently from stocks and bonds won’t rid your clients of risk. They will, however, spread it more intelligently.

3. Rebalancing and weatherproofing your portfolios

Asset allocation is not an exact science. But in general, low- or non-correlation between assets will increase the diversification benefit they bring to a portfolio. Remember – correlation is dynamic and won’t stay the same over time, especially during periods of market stress. Only by regularly rebalancing will you be able to reassure clients that their portfolios can weather the storm and maintain good returns.

Show clients that you have their back

While you’re here to help your client build a portfolio that matches their goals, it doesn’t hurt if they’re switched on to how skilful asset allocation can help them get there safely. Some clients are hands on, others are hands off. Either way, if they have an understanding of why you’re building the portfolio the way you are, it’s good for relations.

Either way, if they have an understanding of why you’re building the portfolio the way you are, it’s good for relations.

The internet is littered with posts about how to choose a broker, and of course having a client’s best interests at heart comes up a lot. By investing beyond the obvious you’re demonstrating that while you’re chasing good returns, you’re also thinking ahead and keeping them secure.

Building trust with your clients can help them to engage in and understand how risk and return really work.

A 360-degree approach

Investing on behalf of clients, you’re tasked with exploring all opportunities to make money, as well as all opportunities to cushion the blows of difficult periods. Adding non-correlated assets to the mix isn’t a magic bullet, but it’s an important part of your drive to achieve higher returns and lower risks.

Its effect is to allow participation in assets that perform well while deadening the negative effects of those that don’t.

It shows clients that you have a 360-degree approach to their wellbeing and it shores up the weak spots in their asset allocation. Again, that’s part of our job – it’s not just to drive forward, it’s to constantly have one eye on a rear-guard action.

That way you can achieve returns, lower risks, dampen setbacks and build trust.

About the author: Marco Saviozzi, CEO

Marco attained an MBA in Finance from the IEMI, Geneve, before starting his career in corporate sales at Xerox. He would eventually move on to French firm Viel (now Tradition), before being headhunted by prestigious London firm ICAP, where he was brought in as head of the French Franc IRS Desk. He quickly rose to become a part of the management committee as Co-Head of the Euro Desk, and later moved to the New York office to head up the Equity Derivatives team. After 14 years at ICAP, in 2007, he opened Newedge – a Calyon / Societe Generale brokerage arm in Dubai. Two years later he would go on to form GMG as a co-founder with several past colleagues. When he is not facilitating trades on behalf of clients, Marco can be found on the golf course or watching his favourites sports – Formula 1 and horse racing.

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First, from your clients, for whom investing in what feels like ‘the unknown’ may not sit easily.

Second, advisors may hesitate too. While you have your clients’ best interests at heart, as you develop successful ways of working it becomes less and less in your nature to deviate from what you know and trust. This is a shame – you could be closing off a wealth of underused opportunities for your clients.

So let’s examine five key facts about alternative investments and allay those fears.

1. Strong diversification potential

As an experienced professional, you will know that alternative assets are often defined not so much by what they are as by what they’re not. For example, the Financial Times describes them as ‘any investment that does not fall into the traditional asset classes of stocks, bonds or cash’.

It’s a useful approach, because the range of investment types populating the ‘alternatives’ bucket can be exhaustive.

Understanding the ‘alternatives’

When we talk about alternative assets, we might mean property – directly owned, real estate limited partnerships, real estate development corporations, or real estate investment trusts (REITs). Other alternatives include private equity, venture capital and hedge funds. The banking disengagement since the 2008 market crash opened up several sectors to private investors.

We could be talking about commodities: precious metals, crude oil, natural gas, and everything from coffee to cobalt. Let’s not forget intellectual property or a whole host of specific categories of value such as rare wines, valuable coins, fine art, or classic cars.

Traditionally, alternative assets have a tendency to be illiquid – many aren’t publicly priced or traded, such as limited partnerships, collectibles, antiques, and many holdings of hedge funds. But that’s not true right across the broad spectrum of the term and investors can get exposure to alternative assets through closed-ended companies like investment trusts, which offer instant liquidity.

In addition, many experts believe that the illiquidity itself is a justified risk, offering attractive returns for the risks assumed.

How to approach diversification

We know that diversification is a key principle of portfolio building – traditionally, investors might use equities and bonds to provide a natural counterbalance to one another. But it doesn’t always work and when interest rates are low, alternative assets can provide a way to offset equities with higher returns than bonds. They seem to be popular: research suggests total global assets managed by the top 100 alternative investment managers reached USD 4tr in 2017.

We know that diversification is a key principle of portfolio building – traditionally, investors might use equities and bonds to provide a natural counterbalance to one another. 

2. Little or no correlation to the rest of the market

To be useful, the diversification built into any portfolio has to be functional. The asset allocation must flex and respond in a way that is complementary – while some fare badly, others need to be doing well. Alternatives that invest in currencies, commodities and real estate typically have low correlation to traditional stocks and bonds.

Some asset classes are immune from the markets and investors’ feeling, sourcing their performance drivers from factors such as climate, longevity and the legal field.

How low correlation helps reduce portfolio volatility

Take commodities: as ‘real assets’ rather than ‘financial assets’ these raw materials can help to offset the effects of inflation. Demand leads to scarcity, which leads to inflation and commodity prices generally rise when inflation accelerates. Conversely, rising inflation tends to hurt fixed-income assets and equities, so adding alternatives to the mix can help reduce overall portfolio volatility.

The efficient frontier

Based on their risk appetite and tolerance, the investor should build an investment portfolio by seeking an optimum investment to get the best possible returns. When setting up their investment strategy and portfolio, the investor should design the best balance between risk and return, as shown in the below efficient frontier graph.

To achieve an optimal portfolio, diversification is key. Alternative and uncorrelated assets to traditional markets will have a significant impact on the portfolio’s performance. Alternative assets tend to behave differently than typical stock and bond investments, so adding them to a portfolio may provide broader diversification, reduce risk, and enhance returns.

3. Low volatility

While some alternatives, like venture capital and REITs, may well be volatile, others can be quite the opposite. Litigation funding, for example, is largely immune from market swings. With this type of investment it is possible to achieve returns across a portfolio similar to private equity, but in a shorter time frame.

Litigation funding involves investors allocating money to finance lawsuits. The majority of providers offer non-recourse funding, making it inherently risky for investors. However, choosing a capital protected fund offsets the risk via an insurance policy.

Litigation funding involves investors allocating money to finance lawsuits.

Making low-volatility investments available to your clients

Many alternatives are far less volatile than the average stock market asset. By making these low-volatility investments available to your clients, you can offer them a better-than-average level of confidence as well as the promise of healthy returns.

4. High returns

Analysis shows that alternative assets can generate stable, high levels of income. Private mortgages or private debt, for example, can see returns of 12% per year. In a recent paper, JP Morgan found that ‘an allocation addition of core alternative assets as small as 5% can significantly enhance portfolio outcomes’.

Helping your clients enhance their returns

As an investment professional, it’s your job to invest and manage your clients’ money in a way that helps them grow their wealth and reach their financial goals. That means spotting opportunities to enhance the returns of the overall portfolio. Alternative assets provide a way to squeeze out that bit more potential return for your clients’ investment portfolio.

5. Reliable regulation

The long-standing notion that alternative investments are poorly regulated compared to more traditional asset classes no longer applies. Since the financial crisis of 2008 several key pieces of legislation have been introduced. These include the Alternative Investment Fund Managers Directive (AIFMD), which focuses on EU-based hedge fund management firms, and the Dodd-Frank Act, which supervises US-based hedge fund firms.

The long-standing notion that alternative investments are poorly regulated compared to more traditional asset classes no longer applies. 

According to the Alternative Investment Management Association, ‘Increased regulation since the global financial crisis and adherence to industry sound practices have considerably strengthened investor protection and provided for greater transparency.’

Reassuring your clients on regulatory issues

Nowadays, alternative investment management firms must comply with strict standards around conduct, transparency and conflicts of interest. This should give your clients reassurance to invest in non-conventional but more fruitful assets.

Time to spread your wings

Alternative assets aren’t a whole new way of building portfolios – the traditional asset allocation frameworks around equities and fixed-income remain.

What they do represent, from a fund management perspective, is an exercise in going the extra mile and maximising, rather than just maintaining, client portfolios. It’s no longer the Wild West out there; alternative investments have been brought to heel but their promise and diversity remain undimmed.

About the author: Marco Saviozzi, CEO

Marco attained an MBA in Finance from the IEMI, Geneve, before starting his career in corporate sales at Xerox. He would eventually move on to French firm Viel (now Tradition), before being headhunted by prestigious London firm ICAP, where he was brought in as head of the French Franc IRS Desk. He quickly rose to become a part of the management committee as Co-Head of the Euro Desk, and later moved to the New York office to head up the Equity Derivatives team. After 14 years at ICAP, in 2007, he opened Newedge – a Calyon / Societe Generale brokerage arm in Dubai. Two years later he would go on to form GMG as a co-founder with several past colleagues. When he is not facilitating trades on behalf of clients, Marco can be found on the golf course or watching his favourites sports – Formula 1 and horse racing.

The post Breaking tradition? Why you should open your clients’ eyes to alternative assets appeared first on GMG.

As interdealer brokers, we’re here to find buyers, negotiate the best price and close deals. It can be a lucrative profession – brokers charge banks a commission on every trade and can expect to keep around 60% of those commissions. But it’s a tough profession too, requiring commitment, a broad skillset and superhuman endurance.

In this article we’ll look at what interdealer brokers do and then what you need to get ahead in this profession. 

What’s an interdealer broker and why become one?

In a sense, we’re the engine room of the deal. We sit between buyers and sellers, linking one to the other. Without us the deals don’t get made – or at least they would take a lot longer and risk compromising the financial position of those involved.

Our clients are corporates rather than individuals and we establish a means for them to buy and sell financial instruments – whether it’s bonds, equities, currencies or commodities. As one recruitment site puts it ‘the broker acts as an intermediary, providing a pool of liquidity in which these market participants can buy and sell’.

Our clients are corporates rather than individuals and we establish a means for them to buy and sell financial instruments.

All straightforward so far – we help our clients to trade efficiently (and anonymously if they wish) up to the point of execution.

But what’s it like on the other side? Well, it’s competitive field with long hours, plenty of client interaction and the responsibility of dealing with large amounts of their money.

So here are five key steps to becoming an interdealer broker.

1. Decide what you want from the job: If you’ve already taken a long, hard look at yourself and at the job as well, your next major decision will be about your ideal firm. There are giants in this industry – around 70% of the global business takes place in London and New York. And until recently there were five major players – ICAP, Tullett Prebon, Tradition, BGC Partners and GFI Group. Last year, the first two on that list merged and so the big five became the big four.

Now, there are advantages to working in larger firms – they include the prestige of a recognisable name and the promise of a shiny benefits package. But there are downsides too, including the relative anonymity. In our profession, making a name for yourself is essential and the more you blend into the background, the harder it will be to build your reputation.

Fortunately, among the giants there are smaller, lighter and more agile boutique brokerages. That’s true of the UAE, which remains a hotbed of SME activity – 103 of the best performing SMEs in the country reported an average growth rate of more than 150% last year. Working for a boutique brokerage will throw you in at the deep end, but it offers opportunities for accelerated learning, quicker job progression and the forging of a cast-iron, flame-retardant reputation. You can read more about how small really can be beautiful in our article – Why big isn’t always better for brokers.

2. Understand education: Education is an important consideration, as long as you realise it doesn’t stop with your final exams. If youth is so much on your side that you’re still studying, or considering your options, then focusing on finance goes without saying. But it’s useful to narrow down exactly what you want to study. Corporate finance, for example, will cover things like assessing the market value of corporations, risk mitigation strategies and mergers and acquisitions. On the other hand, you might major in international finance, opening up topics like international monetary systems and global financial markets.

All of this would be useful as a broker, but you could study smarter too. Behavioural finance for example, seeks to explain the ‘why’ as well as the ‘how’ in looking at financial decision-making processes. As a behavioural economics major you would be learning the psychological, social and economic analysis techniques that will help you to understand why individuals, firms and ultimately, the markets, behave in certain ways.

It’s not surprising that the current top ten universities for economics includes all the British and American universities you might expect. MIT heads up the list, followed by Harvard and Stanford. LSE is at number four, with Oxford and Cambridge also making the cut. But becoming a successful broker doesn’t begin or end with getting into one of the elite universities. In a sense, your real education begins the day you first set foot inside your chosen firm. This isn’t the education of theory, stochastic models and textbook answers; it’s the on-the-job, trial-by-fire education that only comes with getting stuck in. You may want to explore internships at an interdealer brokerage as well – it doesn’t mean you have to become trapped in their corporate structure, but it will help you to assess whether or not the field is right for you.

3. Look for mentors: With that in mind, it’s a good idea to work with – and listen to – those who have been in the business longer than you have. That doesn’t mean blindly following their every move, but you should understand that a glowing university record doesn’t guarantee success. Resumes don’t make reputations, so once you’re in the field you need to watch and learn from more established players. Humility is as important as confidence and every interaction is an opportunity to learn.

Resumes don’t make reputations, so once you’re in the field you need to watch and learn from more established players.

It’s up to you how proactively or reactively you make these connections – you can let relationships establish themselves naturally, talking shop at social occasions, or engaging in sporting activities. Or you could make a more formal overture in taking on a mentor. Mentoring is increasing in popularity, particularly among younger professionals. A 2016 global report from Deloitte found that among those who intend to stay with their organisation beyond five years, 68% have a mentor.

You may find that through connections at work, you’re able to meet and speak with those who have fought and won the battles before. For example, Robert Bowles from ICAP notes the importance of ‘attention to detail, interest in the product and the ability to adapt to different personalities’. He adds, ‘understanding that the conversation you have with a manual trader at a bank is going to be very different from a quantitative trader at a hedge fund is essential. Tailoring your material to their needs and language is what makes the difference’.

Before you can speak with the voice of experience, listening to the voice of experience can help you to be forewarned and forearmed.

4. Rely on yourself: Remember though, while it’s good to absorb the knowledge and experience of others, you need to be able to stand on your own two feet. It’s essential to have a healthy respect for your customers, a good moral compass and a determination to do the job well – but remember that ultimately every broker is trying to do the same thing as you, that is build a reputation and get ahead.

That means you should pick up what you can along the way, but strive to be self-reliant as well. Being a broker, like being a trader, can be an unforgiving environment – in the words of Moneyweek’s Deputy Editor Tim Bennett, ‘this is one of the most cut-throat places in financial markets’. You need to develop strength of character, resilience to knockbacks and the ability to consider your next move with both courage and clarity.

5. Develop a varied skillset: Clearly, if building such a skillset was easy, everyone would be a great broker. You won’t develop a skillset like that quickly and, unless you’re gifted with boundless charisma and magnetism, the truth is you’re going to have to work really hard. It’s a fast, demanding field that comes down to executing as many trades as possible in market hours. That means toiling before the day even begins to soak up the news and understand market sentiment. It also means thinking on your feet, juggling priorities and reacting quickly and effectively to changing situations.

It’s a fast, demanding field that comes down to executing as many trades as possible in market hours.

But your soft skills are essential too, because you need to function well over a period of years, alongside both colleagues and clients. At its heart, interdealer broking is about people, communication, trust and reputation. That means knowing people, but it also means knowing yourself. Of course, success requires confidence and commitment, but it demands fluid intelligence and self-awareness as well. The best brokers have the foresight to know what they don’t know, then identify and learn from those who do.

The reality is that while we’ve looked at your first five steps, a smart broker understands these are just the beginning of multiple phases throughout their career.

About the author: Marco Saviozzi, CEO

Marco attained an MBA in Finance from the IEMI, Geneve, before starting his career in corporate sales at Xerox. He would eventually move on to French firm Viel (now Tradition), before being headhunted by prestigious London firm ICAP, where he was brought in as head of the French Franc IRS Desk. He quickly rose to become a part of the management committee as Co-Head of the Euro Desk, and later moved to the New York office to head up the Equity Derivatives team. After 14 years at ICAP, in 2007, he opened Newedge – a Calyon / Societe Generale brokerage arm in Dubai. Two years later he would go on to form GMG as a co-founder with several past colleagues. When he is not facilitating trades on behalf of clients, Marco can be found on the golf course or watching his favourites sports – Formula 1 and horse racing.

The post 5 steps to becoming a successful interdealer broker appeared first on GMG.

But is big always better? As a new broker it can be tempting to target working for the biggest, most well-known firms, as if their greater size and visibility will somehow increase your own.

It could do the opposite.

It’s true that not many SMEs are on the list of best places to work in the UAE: just two firms with fewer than 60 employees make the cut according to greatplacetowork.com. Still, SMEs make up a huge proportion of the UAE workforce – around 94% – and they’re a more important part of the economy here than in most countries around the world. Not to mention that, statistically, you’re more likely to land a job with a smaller firm.

So, before you start concentrating on larger brokerage firms, let’s look at the evidence. Because boutique brokerages may not always match the perks associated with big companies, but they could offer you something even more valuable, at a critical point in your career.

Boutique brokerages may not always match the perks associated with big companies, but they could offer you something even more valuable, at a critical point in your career.

Here’s why small really can be beautiful. 

Focusing on what you want

To attain a position at the best possible firm, you need a solid grasp of what you’re setting out to achieve. If you’re looking for prestige and brand recognition there’s little doubt that landing a role with one of the large global institutional brokers, most of whom have offices in Dubai, will achieve that. Or, talking of brand recognition, HSBC Middle East Securities is listed on both the ADF and the DFM and there can be few places in the world that won’t recognise the name.

But is it about name-dropping, or making a name for yourself?

If you’re not concerned with the name above the door, another temptation may be company perks. Larger companies are more likely to have the resources to provide healthcare, expenses accounts and fuel allowances among other benefits. But while perks can be attractive in the short term, according to an article in Forbes magazine last year they don’t usually make or break the decision to stay and deliver great work in the longer term.

Of course benefits will always be attractive – a recent report by Fractl placed healthcare squarely at the top of the list. But attractive is not the same as important, and a Gallup poll last year found that among millennials- who make up an increasing portion of the workforce – 87% believe development is important in their job.

Perks vs opportunities

With a large firm you may find development opportunities such as training courses and workshops form part of your employment package. What you might not find is the opportunity to develop on the job, through rolling up your sleeves and getting stuck in. That’s much more likely to happen in a smaller company where the input of every person matters.

This year, the US medical insurer Aflac surveyed 1,000 employees of small businesses in the USA. The top drivers of employee happiness were flexible scheduling (at 27%) and seeing the fruits of their labour (at 23%). But look at the others on the list, and the reasons for choosing a smaller company start to become clear. Employees of small companies feel like their input makes a difference, that they are being rewarded for hard work, being noticed by people who matter, and are broadening their skill set. And more than two-thirds of the employees surveyed said that feeling more appreciated was a benefit of working for a small company versus a large one.

That’s not to say smaller employers don’t offer good benefits packages. The same survey found that they do. But it also noted that ‘small businesses offer unique intangible benefits that employees know they can’t find in any other workplace’. Working in a smaller business can make it easier to be noticed – to be seen doing a great job and making a difference. 

Small businesses offer unique intangible benefits that employees know they can’t find in any other workplace.

Being noticed is important

As a broker, your reputation is the cornerstone of your career. We’ve all heard the famous quote that it takes 20 years to build a reputation and five minutes to ruin it, but to get a reputation in the first place you need the opportunity to build it. That means learning on the job, developing and demonstrating your abilities. Only then can you show your value, both to your employers and to your clients. That’s what I mean by opportunities rather than perks. Perks add value to your remuneration package; opportunities add value to you.

With a smaller firm you’re more likely to be noticed simply because there are fewer other employees around you. On the one hand, of course, if you mess up there’s nowhere to hide. But if you’ve applied yourself diligently you’ll be able to show your worth. In a startup you can get right in on the ground floor and move rapidly up the ranks as the company progresses. Even if you decide to change jobs eventually, a resume showing involvement in a startup that went on to succeed is as valuable an attribute as a big name. Or perhaps more – earned glory shines brighter than reflected glory. 

The psychology of appreciation

Along with greater opportunities to do work that gets you noticed, a smaller, tighter team means you’re more likely to be on the receiving end of appreciation when you do well. An experiment carried out by the University of Pennsylvania divided fundraisers into two groups, then asked both groups to chase alumni donations. One group received a pre-emptive talk from the director of annual giving, who quite simply expressed her gratitude to them. The other group didn’t receive the talk. Over the following week the group that received the ‘pre-emptive thank you’ made 50% more calls than the group that didn’t.

Being appreciated at work is more than a pat on the head – it makes you more engaged and more focused. That’s good for your employer, but it’s good for you as well. 

In at the deep end

While you’re working hard, staying engaged and being noticed for doing so, working with a smaller brokerage will also give you the opportunity to build up your entrepreneurial skills.

‘Entrepreneur’ is a term that’s misunderstood, often simply used to describe someone starting a business. That’s the wrong way round. Yes, starting a business may be the result of someone possessing an entrepreneurial skillset, but being an entrepreneur also involves time management, organisation, leadership and teamwork skills.

These are abilities that feature highly among the best brokers, especially in a small firm where you need to thrive on your own terms, make considered decisions and use your time well. We spend much of our day following the markets, keeping up with the news and looking to understand the psychology that underpins our profession. Being thrown in at the deep end forces you to become proactive and decisive – essential skills when you later have to take responsibility for big decisions dealing with clients’ money. 

Big companies can be too big

As the FT noted in an article in 2015, larger organisations can become too large to manage effectively. At the extreme, businesses can lose control of their decision making, resulting in bad strategic choices, failed acquisitions, regulatory action and fines. Major players in the banking industry have been repeatedly fined over the last decade – in the UK the bill comes to GBP 53bn. When cost pressures mount, it’s easier to let go of employees who have had little opportunity to prove themselves, who are little more than numbers in a spreadsheet.

As the FT noted in an article in 2015, larger organisations can become too large to manage effectively.

Indeed some large companies are trying to restructure their decision-making processes, to ape those of smaller businesses. Amazon CEO Jeff Bezos introduced a ‘two-pizza teams’ initiative, aiming for the principle that all decisions should be capable of being made by groups that could be fed with two pizzas. It was a noble thought, but in a firm of Amazon’s size, it wasn’t altogether successful. The reality is that large companies are like oil tankers, with responsiveness to match. Whereas a small boutique is more like a nimble sailing boat – light, controllable and able to navigate the changing seas with great agility. 

Is going small the biggest opportunity out there?

It’s up to you to decide what you want from your career as a broker. For some, a good salary and benefits package will be enough, but in our profession it’s good to examine everything twice before pulling the trigger. There’s nothing wrong with ‘big’, if it’s applied to the right things. A big salary won’t hurt and a big name can sound impressive, but what about the big picture?

When you’re just starting out, you’re on a path of learning and development. That path can be as long, short, smooth or bumpy as you want it to be. Many a perfectly good career will be played out within the machinery of large, established firms. But a few, glittering careers will be forged in the fires of experience, working both hard and smart. Those brokers will build resilience, determination, respect and cast-iron reputations.

They’ll be the big players of tomorrow.

About the author: Marco Saviozzi, CEO

Marco attained an MBA in Finance from the IEMI, Geneve, before starting his career in corporate sales at Xerox. He would eventually move on to French firm Viel (now Tradition), before being headhunted by prestigious London firm ICAP, where he was brought in as head of the French Franc IRS Desk. He quickly rose to become a part of the management committee as Co-Head of the Euro Desk, and later moved to the New York office to head up the Equity Derivatives team. After 14 years at ICAP, in 2007, he opened Newedge – a Calyon / Societe Generale brokerage arm in Dubai. Two years later he would go on to form GMG as a co-founder with several past colleagues. When he is not facilitating trades on behalf of clients, Marco can be found on the golf course or watching his favourites sports – Formula 1 and horse racing.

The post Big or boutique? Why ‘going small’ leads to great opportunities for brokers appeared first on GMG.