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Even those who undertake the time honoured method of investing in bricks and mortars are not immune from the crisis. Investing in properties has long being regarded as the safest and most practical way to build up our equity value. But as recent developments in the global economy have shown, when the US sneezes, the whole world catches a cold. Here down under, we are not immune as well. Over the past few months, it has become harder to get a loan from the banks to pay for our housing purchases. Interest rates have also got up making it more expensive to borrow as well. This is on top of the fact spruikers generally have a free rein to milk unwary investors of their life savings like in the case of Fincorp, ACR and Westpoint. Together, the collapse of these companies has resulted in losses of A$1 billion for thousands of unsuspecting retirees. Regulatory authorities like the Australian Securities and Investments Commissions (ASIC) could have done more to protect investors but did not. Their reasoning was the fact that the ASIC cannot be accountable for approving any investment prospectus but rather that burden lies with the issuer or its advisors.
In addition to investing in properties, most Australians also resort to financial planning to build up a portfolio of assets. Being a social welfare state, we also have the option of not doing anything but just relying on the aged pension. But like Ms Gillard, our Deputy Prime Minister, has mentioned even she will not be able to survive on the pension currently doled out by the pension system. If living impoverishly appeal to one as an ideal way to retire then the state welfare system can be depended upon on to provide for this living standard. In fact, the majority of these pensioners are living near the poverty line. Alternatively, we can also choose to self fund our own retirement with the superannuation funds. Regrettably, the superannuation funds are not immune from the effects of the credit crisis that the global economies are facing today. Due to the tightening of credit in the financial markets, share prices on the Australian Stock Exchange (ASX) have been declining by as much as 30 percent since late last year. The ultimate result is that returns on superannuation funds have also declined.
The tightening of credit on the world’s financial markets is due to the fact that the financial system is currently being poisoned by the exotic money market instruments like Collateralised Debts Obligations (CDO’s), Mortgage Backed Securities (MBS’s). Most of us have never even heard of CDO’s, MBS’s until we are witnessing the effects of these “toxic assets”. For many of us, especially those who are nearing retirement age, the credit crisis is proving to be excruciating costly lesson. To add insult to injury, the effects of the credit crisis are not just confined to declining shares prices and superannuation funds. Local councils like the Wingecarribee Shire council have lost monies earmarked for the development of schools and road due to these “toxic assets”. The money market instruments have traditionally been regarded as prime value investments due to the fact that the fixed yield and stability of these instruments are a well balanced mix over shares and bonds.
Because globalisation has changed the way the world’s economies interact with each other, the traditional views and models of investments are no longer applicable. Even the way share prices are determined has also changed. Dividend payouts used to be the beachmark on how a share is priced. With increased competitions among the market traders, news ways of generating revenues are being adopted. Computers, algorithmic trading programs and quantitative analysis like statistical arbitrage are now leading the way how market traders generate profits. When used together, these factors become a powerful trading tool for hedge funds to milk billions of dollars in profits daily from even two decimal points differences in share prices. With the volume of shares traded by these hedge funds, they are able to cause share prices to rise or fall due to their trading methodologies. It doesn’t matter which way the market is moving as the use of statistical arbitrage allows hedge funds to cover both ends of the market movements. Their risk level is effectively zero or near zero level.
Unfortunately for many of us, we will not have the ability to capitalise on these systems on the financial markets as the cost of development and maintenance of these complex system runs into millions of dollars. Nevertheless, a former London City stockbroker, Rajeev Shah, demonstrated that with a customised algorithmic program called the ArbAlarm, one can also apply the same mathematical principles to sport arbitrage. (To gain more insight, read: “Sports Arbitrage–How to place riskless bets & create Tax free investments”). The globalised economy has opened up increased trading opportunities among the nations of the world. It has also allowed corporations to raise capital globally to fund their investment. However with the increased interaction between trading nations, globalisation have also brought with it risks that has a profound effect on our lives whether we like it or not. Our retirement nest, like many retirees in the US are finding out now, is slowly diminishing in value day by day. Perhaps it is time for us to open up our minds and look for alternative investment vehicles to fund our retirement. Maybe the only safe haven to fund our retirement is from somewhere which has no relationship with the global financial market, regardless of how unorthodox it may be.
Australians like most people dream of a comfortable retirement. Each of us, all have a vision of how our retirement will be like. Some of us dreamt of lazing away in the sun by beach. Other dreamt of a ranch in the outback, living in harmony with the surroundings. Whatever our dreams are, we all strive to work hard to make it come true. We save and we invest to build up our “nest” of funds in order that we can reach our ultimate goals during our golden years. To achieve this, we put our hard earned monies into superannuation funds, mutual funds and properties hoping that in the near foreseeable future that we will be able to reap the rewards of our sweats. These are the ways that we know how to realistically achieve what we have dreamed off. We are pragmatic about what we can do and none of us believe in “get rich quick schemes”. Unfortunately the current credit crisis brought about by the collapse of the housing bubble in the US has all but shattered our dreams and hopes.
The credit crisis had come about due to greed and recklessness of supposedly financial experts at Wall Street. Most of us have no inkling what are Collaterised Debt Obligations (CDO’s), Mortgage Backed Securities (MBS’s) until the current credit crunch. The worldwide credit crisis faced by all of us now is proving to be a painful and rude awakening for many of us. Painful because the hard earned money that we have stashed away which were regarded as safe and conservative investments are now diminishing in value by the day.
Those who took the traditional approach of investing in “rock solid” investments like bricks and mortars, are finding themselves faring no better than before. Putting our money into properties has traditionally being the favorite mode of saving for our retirement. However, the crisis faced by the world today have demonstrated that the real estate market in the US also have the ability to affect us here in Australia. Interest rates have spiked and have made it more costly to borrow to fund our purchases. This is in addition to the fact that the banks are also tightening their lending. To make matter worse, spruikers are not making things easier for property investors to discern what a legitimate investment is. The collapse of Fincorp and Australian Capital Reserve (ACR) are all stark remainders of what are in store for us if we are not careful with whom we entrust our hard earned money to. The Australian Securities and Investments Commission (ASIC) tasked with the job of overseeing investors’ interests have fared pretty poorly in their job resulting in thousands of retirees losing their life savings. Their explanation is that ASIC is not responsible for approving any prospectus rather that is the responsibility of the issuer and the advisers. For the thousands of investors who had lost an aggregate of A$1 billion, that explanation brings little comfort.
Apart from properties, unless we struck it rich by chance, Australian generally has one of the following options to adopt for their retirements plans. The easiest is to not do anything and just seek the aged pension. But as our esteem Deputy Prime Minister had said, even she will be hard pressed to survive on the pension that is currently being doled out by the Australian Government. Indeed many of our seniors on the pension system now are living near the poverty line. The alternative is to self fund our retirement with the superannuation funds. Unfortunately, even that now is subjected to events that are happening at the other end of the world. The loss of investors’ confidence in the world’s financial markets had lead to declining shares prices on the Australian Stock Exchange (ASX). This in return have resulted in our superannuation funds returns declining as well. The effects are not just confined to our retirement funds. Local councils like the Wingecarribee Shire council have also lost all their surplus monies in supposingly prime value money market instruments. Even with the much publicised $700 billion dollars bailout plan by the US government, lawyers for the local councils have said it is doubtful that the many local councils which have invested in mortgage backed securities in the US will ever see a single cent returned. What this mean is that many of the schools, clinics or roads that are to be built in the future will never get off the drawing board.
The money market instruments investment have always been the core of any investment portfolio because the fixed interest yield strike a balance between volatility of the shares prices and the returns of low yield treasury bonds. However due to the way the globalised economies interact with each other, all the traditional models of investments are no proving to be really practical. A company stocks was previously valued based on how much dividends that it would return to its shareholders. Today with the advert of computerised trading and newer and creative ways of accounting, shares prices are valued based on their earning forecast. In addition as the financial market become more competitive, market traders are turning to other ways of generating more income. Using complex computer programs based on algorithmic patterns and quantitative analysis like statistical arbitrage, hedge funds are able to squeeze billions of dollars in profits daily with as little as two decimal point price differentials between any two assets. This is why we hear of hedge funds being able to cause the price of shares to fall or rise by their trading. Irrespective of the direction a market is moving, hedge funds with their systems are able to profit because profitability now is not dependent upon the yield of the share but rather on the price differential between two complementary shares.
Unless the ordinary investors have the financial means to develop and maintain such systems, this form of investment is out of our reach. However a former London City stockbroker, Rajeev Shah, illustrated that arbitrage trading is not just limited to the financial market. The same mathematical principles which had provided risk free investments for the hedge funds in the financial markets can be applied to the world of sports betting. Customising a system developed during the 1980s by the investment bank Morgan Stanley and using an algorithmic programmed software called ArbAlarm, sport betting ceases to become gambling as statistical arbitrages has reduces the risk to near zero level. (To know more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). On top of that, the Australian Tax office is not able to tax profits derived from Sports Arbitrage. (See Australian Tax ruling TR2004/DR17). With all that is happening around us today, the world is getting smaller and making it harder to insulate ourselves from all the problems in the world. What the current credit crisis had shown is that our traditional view of our financial matters no longer holds true. Unless we start to learn and rethink outside the box and explore all our investment options, we might find ourselves out in the cold through no fault of ours. Today Main Street is paying for the folly of Wall Street and sad to say, even the Wingecarribee Shire council is also helping to pay.
Today with globalisation, Australians are enjoying a standard of living which is the envy of many nations in the world. The boom in commodities prices has brought our country’s GDP to the level of those major developed countries in Europe. Many of us are also looking forward towards our ‘golden years” when we retire. Our wise investments and careful financial planning are just waiting for us to cash out so we can reap the fruits of our labour. Life couldn’t be better and all the problems in the world seem so far away. Until a few months ago, this was the idyllic vision that most Australians have in their mind. The full impact of what is happening in the US didn’t hit us until we started to see the consequences of the subprime leading crisis on the major economies of the world. Little by little, we are now beginning to feel the ripples of the fallout. Our prudential financial planning for our retirement now seems helpless against the onslaught of bad news that is hitting the news daily.
For those who had planned their retirement around properties investments are finding themselves not insulated from the current credit crisis as well. Property has traditionally being seen as the most stable and fail safe model of investment. The phrase “You can never go wrong with bricks and mortars” is nothing more than a fallacy now. With globalisation, property developers have funded their projects with Real Estate Investment Trust’s (REIT) funds. These funds are in turn obtained from the world’s financial market. With the credit crisis now, many property firms are now finding their sources of funds being cut off leading them to become insolvent. Apart from this, rising cost of funding due to the credit squeeze has resulted in declining demands pushing down the value of homes. To make matter worse, the demise of corporations like ACR, Fincorp and Westpoint demonstrated how easy it is for spruikers to raise money from thousands of unsuspecting victims. The complacency of the Australian Securities and Investments Commission (ASIC) is not helping investors to feel confident in further investment in the Australian real estate market.
Many Australians also use financial planning to amass a portfolio of investments for their retirement purpose. Of course being a welfare state, the State will provide for our pension if we choose not to do anything for our retirement. But most of us are hard working and living near the poverty line doesn’t seem to appeal to most of us as retiring comfortably. Even our Deputy Prime Minister, Ms Gillard, find it hard to survive on the current state pension scheme. This is why many of us choose to self fund our retirement through the superannuation funds so that we will not have to compromise on our standard of living. Unfortunately current events in the world financial markets are also affecting the returns on superannuation funds. Because of the credit squeeze, this has resulted in value of shares dropping by as much as 30 percent since the beginning of the year. As share prices drops, the value of a superannuation funds also drops as the funds are nothing more than just a basket of diversified financial instruments.
The current credit crunch is the result of the world’s financial market being clogged up by risky and questionable assets which many of the financial institutions are stuck with. To remove these toxic assets from the financial market, the US Federal Reserve have seek to buy them up with the enactment of the Emergency Economic Stabilization Act of 2008 or more famously known as the $700 billion Bail Out Plan. Beside from the adverse effects that these toxic assets have on our property value, share prices and the returns of our superannuation funds, monies earmarked for community development have also been depleted as in the case of Wingecarribee Shire council. Long regarded as prime value investments, money market instruments are popular because they represented a good balance between yield and stability as compared to shares and bonds. Even with the bailout plan, lawyers acting for the local councils which had made investments in these mortgage backed securities are doubtful that they will be compensated by the US’s bailout plan.
Globalisation has brought a new world order which had benefits us in terms of trade and development. But with increased interaction between all the trading nations of the world, there is also an increased dependency with each other. This had the effect of intensifying risks into areas which were previously impervious to external influences. The traditional models of investment are proving to be outdated as the current credit crisis has shown us. For example, the value of a company stock used to be determined by the yield of its dividend. Today this is no longer the case. With technological advances, shares prices are being determined in ways we had never imagined. With increasing competitions and decreasing margins brought about by globalisation, market traders are seeking alternative avenues for increasing their revenue. One of these ways is to take advantage of inherent market inefficiencies. With the use of complex computer programs and statistical arbitrage, market traders are making billions daily just by trading based on price differentials of two or more complementary assets. It doesn’t matter how small these differential are or which way the market is moving. Their systems virtually eliminated their risk level. With the kind of volume which these market trader deals in, it is not surprising that they can create “market sentiments”.
For many of us, we can only dream about systems like these as the development of these sorts of systems requires heavy capital investments costing millions of dollars. In addition, these systems also require heavy maintenances. On the other hand, a former London city stockbroker, Rajeev Shah, illustrated that using a customised algorithmic program called the ArbAlarm, based on the system developed by the investment bank Morgan Stanley during the 1980s, the same mathematical principles is applicable in the Sport Arbitrage world. (To gain more insight, read: “Sports Arbitrage–How to place riskless bets & create Tax free investments”). For many of us, this is as close as we can get to having a taste of how hedge funds made their monies using complex algorithmic systems. The current credit crunch for many of us is proving to be a rude awakening experience. For those soon to retire, diminishing values of the retirement nest is causing endless sleepless nights as we worry about our options. Perhaps, we should seriously consider and study what other options that we have to secure our retirement that is impartial to influences from the global financial market regardless of how unorthodox the option maybe.
Even with the passage of the Emergency Economic Stabilization Act of 2008, notoriously known as the bailout plan, auto dealers all over the US are beginning to drop like flies as the ripples of the credit squeeze unfolds. Auto dealers, much like the banking industry, is highly leveraged and are dependent upon lending to finance their inventories. With dwindling source of credit, auto dealers are now forced to cutback on their inventories. This is in addition to declining sales as consumers shy away from making additional purchases due to the uncertainties surrounding the effectiveness of the bailout plan. “Floorplan financing” are dependent on the London Interbank Offer Rate or LIBOR for short, which is the beachmark for the $10 trillion global short term credit market.
With the current credit crisis, banks are more cautious about their lending resulting in the LIBOR increasing considerably over the past few months. This is despite interventions by Central Banks all over the world injecting additional liquidity into the financial market. As a result, even though the auto manufacturers’ finance companies are concentrated on auto loans, the situations they face are similar to conventional banks. Industry figures have shown that the US auto sales for September 2008 had fallen for the first time in 5 years to below the one million mark. Already the US largest dealer for the Chevrolet brand, Bill Heard Enterprise Inc, has become casualty to the credit crisis. On September 28, the company has filed for bankruptcy protection citing rising oil prices, declining sales and credit crunch as reasons for its demise.
Meanwhile in Europe, Germany, a country famous for its prudent management of its financial institutions, has become the latest European nation to announce a bailout plan for the Hypo Real Estate AG, the nation second largest property lender. In addition to the €50 billion bailout package for Hypo Real Estate AG, the German Government also sought to guarantee private bank accounts to alleviate fears of a meltdown. Torsten Albig, spokesperson for the German Finance Ministry, said that the guarantee covers €568 billion of deposits in the retail banking sector. This latest development came about just after the tripartite agreement between France, Belgium and the Netherlands to bailout Fortis NV, Belgium largest retail bank. Currently the hardest hit country by the fallout of the US credit crisis is Iceland. In the 1990s, Iceland deregulated its banking industry and this has resulted in its banking sector expanding considerably. Today, Iceland is facing a total foreign liability in excess of €100 billion as compared to the country GDP of €14 billion. The Icelandic Government has also recently nationalized Glitnir, the third largest bank in Iceland, prompting rating agencies to downgrade their rating on Iceland. Analysts are eyeing the European Central Bank (ECB) to see whether it would cut its beachmark interest rate as the move will demonstrate that the ECB is extremely nervous about the current crisis.
Already the stock markets worldwide are reflecting the gravity of the situation as shares prices continue their downward spiral. Investors are becoming increasingly more nervous as they see more and more banks failing. Due to lack of details in the bailout plans instituted by the central banks, investors are not convinced that all of these measures have any positive effects on the volatile markets. The declines in shares prices led by the banking sector are also affecting the mining and oil industries worldwide. Export oriented countries like Japan are especially hard hit by the latest development. Australia is currently also facing the same situation with the tumbling of share prices on the Australian Stock Exchange (ASX). Australia currently enjoying a commodity boom is seeing shares prices in its mining sector declining as well. Blue chip mining shares like BHP Billiton Ltd & Rio Tinto Ltd has been falling despite the ban on short selling on the ASX. Right now the question foremost on most investors mind is how long will it take for the effects of the bailout plan to trickle down to the financial markets.
Although globalisation has opened up trading opportunities among international communities, it has also produced an unforeseen effect among the various economies. Rather than diversification of risks, it had instead intensified risks among the interconnected economies in all aspects even in seemingly unrelated areas. Long held beliefs like “rock solid” investments no longer hold true as the value of our investments are also subjected to external influences. The time honoured model of investment used to be based on shares, bonds and money market instruments with their own respective risks level. Money market instruments were the most sought after investments as they provided a good balance between returns and protection against violent fluctuations. But when greed takes precedence over cautions, the results is the propagation of “toxic assets” which bears risks with no correlation at all to its credibility ratings.
Technological advancement has also resulted in changes in the way these investments are valued at. Nowadays, to take advantage of inherent market inefficiencies, the major stock markets in the global economies are controlled by computers programmed with algorithmic blueprints which execute trades even before we are aware of the changes in market conditions. Usually used together with statistical arbitrages, trades are now conducted in terms of milliseconds. System like TradElect on the London Stock Exchange can turn around an order in 10 milliseconds while at the same time process 3000 trades per second. Profits are no longer derived from the inherent value of a share which is reflected in its dividend. Instead, profits are derived from earning expectations as well as market sentiments to which a computer is programmed to response too.
This is the main reason why hedge funds can move market as the volume of trade which they conduct daily runs up to billions of dollars. This is also the reason why hedge funds are the most profitable among all the managed funds in the market. The hedge funds use of algorithmic trading do away with “irrational exuberance” while statistical arbitrage sniff out the temporary “mispricings” of assets simultaneously in several markets, virtually removing almost all the associated risks involved in trading. The only snag to these systems is the high cost of development and maintenances. However the arbitrage market is not just confined to the financial markets as former London city stockbroker Rajeev Shah pointed out. The world of sports arbitrages also operate on the same principles as the financial markets. (To learn more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). With the use of softwares like the ArbAlarm developed using the same algorithmic blueprints as the financial markets, one can also locate the price differential of arbitrages internationally within seconds. The main difference between the sport arbitrage market and the financial markets is the size which makes it accessible to the ordinary investors.
Retirement used to be a straight forward matter where one can just invest in the stock market like the superannuation funds and get a decent return allowing one to retire with a peace of mind. However the current events have shown us that are superannuation funds also subjected to decline in values due to the credit crisis making our future uncertain. If the trend is to continue, we seriously have to consider other options of investments which are free from external influences of globalisation.
Arbitrage traders, or arbsters as they’re known, make serious money, risk-free, from exploiting the price differences between bookmakers. Roland de Wolfe reports on this wiliest of betting strategies.
Serious gamblers should always be on the look-out for new ways to profit from their passion and if you haven’t yet got into sports arbitrage trading, now is the time to give it a try. If you know what you’re doing, you literally can’t lose.
Arbitrage trading has been around as long as bookies offering competing odds have been around. It involves using a number of bookmakers to take prices that differ so much that you’re able to bet on several outcomes and turn a profit irrespective of the result.
In its simplest form, an opportunity for an arb arose in the betting for the last US presidential election, when George Bush was 6/4 in the US and Al Gore was 6/4 in the UK. This meant you could back both to the same stake and guarantee a 25 per cent return, whatever the result. If you’d put ?1,000 on both to win, you’d have lost the Al Gore bet but the George Bush one would have returned ?2,500, eliciting a nice ?500 profit.
Thousands of opportunities for exploiting a sports arb are created every month too. The opportunity to spot and exploit an arb arises whenever a bookmaker’s overround is below 100 per cent, not just when both are better than even money. So, if Tim Henman is 3/1 to take a tennis tournament and Lleyton Hewitt is any longer than 1/3 you’d have the arb, provided you knew what stake to place on each.
The possibility for making profitable arbitrage trades exists in many markets, but is most commonly used in the financial markets. Here, arbs occur when the same instrument is traded in separate markets. For example, the Bund Futures Contract used to trade both in London on LIFFE (the London Financial Futures and Options Exchange) and also in Germany on the DTB (Deutsche Terminborse). Although their prices are mostly the same, there are also times when they are out of line, and this is when arbitrageurs, or arbsters as they’re now more commonly known, would step in to buy at the lower prices, then immediately sell at the higher price. More complex arbitrage opportunities occur between interest rate markets and derivative markets, where a relationship can be synthesised and then arbitraged if the conditions are correct.
While arbitrage in financial markets tends to be dominated by large investment houses and banks, sports arbitrage is available to anyone with the capital, the tools and the time. With a bit of study about how this form of betting works, you can become an expert on identifying and profiting from opportunities that are created every day among the large number of sports bookmakers around the world.
However, although sports arbitrage trading is risk-free, it’s not effort-free. Your success depends on your own level of commitment and hard work. Individual arbitrage prices don’t last for long and there’s a steep learning curve for all new traders.
The man with a system
Sports arbitrage trader Jason Thompson found that he was spending too long finding arbs and not finding enough of them to make decent profits, so he teamed up with City whizzkid Rajeev Shah who devised a computer program he has called ArbAlarm. This system scours bookmakers worldwide for arbs and then instantly delivers them to the inbox or mobile phone of subscribers.
The internet has made finding arbs much easier. Now you can see prices updated instantly on websites and track your money in electronic accounts. However, it’s still a time-consuming business. Arbs don’t last longer than a few minutes, as the weight of money moves the prices and there’s only so much research you can do in the time it takes to identify and exploit the arb.
ArbAlarm changes all that. While a trader looking for arbs manually might have managed to find 200-300 arbs himself last year, this new software regularly uncovers several thousand trades each month.
Shah used to be a currency & futures with a large American bank, but then he swapped stocks for soccer and his trading jacket for a keyboard. His book, Sports-Arbitrage – How to Place Riskless Bets and Create Tax-Free Investments, is considered the reference work in this field of investment.
His website www.sportsarbitrageworld.com has a loyal group of subscribers paying a monthly subscription for exclusive access to the information the software uncovers.
‘I was involved with financial market arbitrage for a number of years and saw how technology was rapidly changing the way deals were done. A year after I left the City, LIFFE moved to a completely automated, computer-based system. This was around the same time that the internet was becoming mainstream and I noticed a large number of bookmakers springing up on the web, which created arbs all over the place.
‘I started searching for and trading these arbs on a daily basis, and once I’d verified that this free money was really what it seemed, I started development on my software, which now scours over 100 online bookmakers across 25 different types of event.’
Arbitrage is normally done on sporting events where there are a small number of outcomes, such as football, tennis or baseball. The average arb value on ArbAlarm is just under 3 per cent. This means you tend to stake a lot for a number of small but guaranteed returns. The more capital you have, the more money you make, but if you’re clever you can make your money behave as though it were five times greater in amount than it is.
According to Thompson, ‘The power of leverage can make your profits increase sharply. If you cover enough arbs in short-term markets, £1,000 can be turned over three or four times in the month. Speed of turnover is the key – low percentages don’t really matter,’
Some bookmakers require a credit card deposit, and deposit fees may be incurred. ‘If you have the capital to leave money in the accounts, then you can get the bet on as the arb occurs and you won’t have to keep paying credit card fees,’ he advises.
He estimates that a trading base of £5,000 will easily net you about £600 tax-free profit every month if you use ArbAlarm for 1 hour each day. Data from surveys of the loyal customer-base of Shah’s website confirm that sports arbitrage traders are well-used to profits amounting to around 12% per month.
The armchair arbster
Paul Hammond, an estate agent from Hackney, got into arbs after seeing how much a colleague was making. He works during the day, so does his arbitrage trading mainly in the evening and has done so for the past two years. He says he makes an extra ?350 in an average month for, on average, just one hour’s work a day.
‘There are more arbs than ever with the explosion in internet betting. You learn when the bookmakers change their prices and get to know which firms tend to offer top price on any given sport. If you look at the odds comparison sites (such as oddschecker.co.uk), you can see what is the high and low end of any market,’ he says.
Hammond doesn’t want to take arbitrage up full time, but it now occupies a place in his spare time that was once filled by more traditional betting methods.
‘I used to bet a lot on football, golf and horses. Now I rarely bother, as then I was a mug punter looking for thrills, whereas now I’m recouping the money I lost. It’s kind of weird to watch a football match now, knowing that I’ve backed both teams to go through.’
The bookmaker’s view
As people who continually make money from betting, it’s logical to conclude that arbsters are the scourge of the bookmakers. However, if you do get involved in arbitrage trading, it appears the bookmakers will be happy to accommodate your bets.
Gary Pearce, sports trading manager at SportingOdds, told InsideEdge: ‘My philosophy is that whenever there’s an arb, there’s always someone laying the other side. We have expert traders who determine the prices we offer, and as long as those prices are true or slightly under the true price, then I’m happy to take bets from accounts we believe belong to arb traders.’
Pearce believes it’s not bookmakers but regular punters who lose out to the arbsters. ‘When we make a selection, we have a safety net of how much we’re prepared to lay on that selection. If we’re top of the market and one half of an arb, the arbitrage money will get us closer to that limit than it otherwise would be, but regular punters may not be able to get on that price.’
So, with state-of-the-art software at your disposal and the government tacitly confirming , via its legislation on betting duty, that it intends to allow sports arbitrage traders to continue enjoying their profits free of tax, risk-free bets seem to be the way to go for anyone wanting to make extra money in their spare time.
With the ripples of the fallout in the US financial crisis spreading all over the world, many are questioning how did all this happened. A majority of people are saying that it all boils down to greed. Though it may be true that greed played a major role in this crisis, another which many overlooked is transparency. A decade ago, a young British trader was dealing with complex financial derivatives in Singapore. As a direct result of his trading activities, Baring Bank lost $1.4 billion in the futures market and closed its doors after 233 years of banking traditions. The doors also closed on Nick Leeson when he was sent to prison for four and half years for the fiasco.
That incident begs the question why a twenty eight years old trader was allowed to deal with such complex and exotic financial instrument like derivatives without any supervision. The main reason was that no one knew any better. The bosses in London just knew the books were showing a huge profit. None of them actually knew anything about derivatives except its name. What Nick Leeson serves to highlight is the generational gap between the top management and those at the trading desk. As long as everyone was making money, everything was okay.
Today the same situation is repeating itself on Wall Street with the proliferation of exotic instruments like CDOs and MBS. Besides the financial institutions themselves having difficulties knowing what they have on their assets portfolios, the Federal Reserve Board and US Treasury are also hard pressed to find a mechanism to value these “toxic assets”. The situation has resulted into this mess as there is a total divorce in corporate responsibility from one’s action. This is a classic case of what “ignorance is bliss” all about. It’s a great excuse for greed.
Five years ago, the US economy faced a similar crisis though on a smaller scale as compared to today. The issue at hand then was the Enron scandal. Hailed by Fortune Magazine as the most innovative in the US for six consecutive years (1996 to 2001), it later became an icon to symbolise American corporate excesses. It also represented the largest bankruptcy in US history back in 2001. Enron collapse played a major role in shaking up investors as it was able to hide its losses for five years through creative accounting. Due to lack of disclosure about its corporate activities, the audit committee of Enron was unable to fulfill its responsibility. In addition, the auditors of Enron also had close ties with the management and this gave them little incentives to pursue further questioning to discover the true nature of Enron‘s financial health.
Besides hiding its losses from investors, Enron’s management was also involved in insider trading and was excising their stocks options just before the collapse of the company. The irony was that, they were also encouraging their employees to invest further into Enron’s’ shares with their pension funds. The result was that a majority of the employees lost their life savings. On February 22 2005, the Bush Administration met with senior Federal financial officials to discuss what to do with the situation. The majority of those at the meeting were against the idea of holding corporate chiefs responsible for the activities of their companies. Most were contented to let the market sort its own problems out by doing nothing. The only two dissenting voices that were speaking out against corporate corruption were Alan Greenspan, the ex Federal Reserve Chairman and Paul O’ Neil, then the Treasury Secretary for the Bush Administration.
The result of that meeting was a half measure adopted by Congress as the Public Company Accounting Reform and Investor Protection Act. The problem was that the Act was more towards holding auditors of the company liable for the accuracy of their client’s balance sheet rather than holding top management responsible. Today, the Bush Administration is asking Congress to approve a “blank cheque” of $700 billion so that the omnipotent Treasury Secretary Mr. Paulson can buy toxic assets from financial institutions with taxpayers’ dollars. Apart from being a direct beneficiary, (Mr. Paulson own an estimated $700 million worth of shares in Goldman Sachs Inc), the plan also call for unquestionable decisions to be made by the Treasury Secretary. There is no provision for any oversight committee to see through the execution of the bailout plan.
We in Australia also face the same complacency as shown by the Australian Securities and Investment Commission (ASIC) with regards to the Fincorp fiasco. When questioned for its lack of regulatory activities, the ASIC claimed that it was not responsible for approving prospectus but rather that task lies with the issuer and the advisors of the issuer. This had brought little comfort to the 8000 retail investors who had lost A$300 million. After Fincorp, came the WestPoint, whom the financial planners touted as a safe investment. The irony was that all the financial planners were licensed by the ASIC.
Successful investors like Warren Buffett and George Soros do not face this sort of situation because they adopt their own approaches towards investing. While everyone was herding towards the credit default swaps market, Warren Buffett warned that these instruments were “financial weapons of mass destructions” as early as five years ago. George Soros made his billions when everyone else was losing money. The main reason George Soros emerged a winner in the currencies market was that he adopted a system of investment called statistical arbitrages during trading. By using mathemical principles, the arbitrages trading system allows an investor to hedge his investment regardless of the market outcome. (To find out more read, Sports-Arbitrage – How To Place Riskless Bets & Create Tax-Free Investments). Initially pioneered by Morgan Stanley Equity Desk Operations during the 1980s, the system today have advanced tremendously to using softwares like the ArbAlarm to allow investors to locate situation for arbitrages within mere seconds throughout the entire world.
The fact of the matter is that despite what the financial experts or government regulatory bodies claims, no investments is totally safe when control goes out of your hand. Before, bricks and mortars were considered “fail safe” investment as you have the physical asset to rely on. But with the subprime lending crisis that is happening around us today, we can see that everything is very much dependent upon external factors beyond our control. Superannuation returns and share prices are dependent on the global financial market. Property prices now are also affected by global economic conditions which are dictated by the very people who had caused the credit crunch crisis in this world.
Compared to a year ago, the corporate bankruptcy rates in the US have raised by 42%.
Firms are also finding it extremely difficult get credit to starve off bankruptcy due to the credit crunch crisis. A notable example is the auto parts maker Delphi Corp now fighting for survival from corporate insolvency. In addition, job losses, foreclosures, and stock market depreciations are engulfing the US economy. Never in the history of modern economics, have we ever seen bankruptcy the size of that of the Lehman Brothers case. The scale of government bailouts like the case of Fannie Mae and Freddie Mac are rewriting the rules of corporate survival as we plough through “uncharted waters”. No sector of the US economy is being spared as the financial market continues its deleveraging process. The domino effect of the crisis have spill over to the Retail sector, Home builders, Financial firms , Airlines and the Energy sector.
As the US economy is reeling in aftershocks, the FBI has launched investigations into firms which had triggered the US government involvement into bailouts for Wall Street. Some of the firms that have been under the inquiries of the FBI for possibilities of fraud are IndyMac Bancorp Inc, Countrywide Financial Corp, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG. The Federal Reserve and the US Treasury department both agreed that the only way to resolve this crisis and bring stability to the financial market is to rid the books of these financials companies of their “Toxic Assets”. The bailout plan proposed by Treasury Secretary Paulson, requires a $700 billion injection into the market to soak up all the toxic assets. This is in order to unlock the credit squeeze the market is currently facing.
Even as the members of Congress debate over the bailout plan proposed by the Bush administration, leaders from developed countries are urging the US to quickly enacted the plan in order to stabilise the global financial market. The Canadian Prime Minister, Stephen Harper, have expressed worries about the fundamentals of the US economy. He acknowledges that the US economy had impacted Canada’s growth. At the United Nation meeting in New York, France and Australia joined in the chorus to call on the US government to quickly find a solution to the crisis. Australian Prime Minister Kevin Rudd said that it is time for the US government to act decisively to restore order in the chaotic financial market. Although the bailout plan may help to give the financial market a dose of confidence and help unlock the credit squeeze, no one had answered the question of what to do with the surplus homes in the real estate market. Furthermore, the positions of those mortgage holders on “Main Street” who are in a precarious situation have also not been addressed.
Many are demanding answers as to how the situation could have gone so bad. The hardest hit in Australia will most probably be the retirees. After the dot com bubble burst, many have shifted their investment focus towards Real Estate Investment Trust (REIT). Today, the REITs are also vulnerable to the credit crunch crisis. Centro, one of the largest property groups in Australia had announced a loss of A$3 billion for the year 2007/2008. Over a period of a year, up to 40% in values have been wiped off the Australian REITs. Another casualty of the crisis is the Superannuation funds. AMP, reported earlier in the year a 22 % drop in profits for the first half of this year alone. Voluntary contributions have also fallen considerably by as much as 33% since last year. In fact many retirees are turning to the aged pension for survival as the superannuation returns slide further. This number had increased by 40% since the last financial year.
Financial planners have advised that when it comes to investment, we should diversify. Another common advice we hear is that bricks and mortars are a safe bet. Many of those who took these investments from so called “experts” have ended suffering when they see their life savings disappeared into thin air. As early as last year, Australians had lost an aggregate of a billion to dubious investment schemes. The collapse of WestPoint, Fincorp and the Australian Capital Reserve (ACR), are all stark reminders that we need to really rethink our investment strategy. Today, in a globalised economy, none of our investments are insulated from any fallout from any major crisis in the world.
Successful investors like Warren Buffett do not follow what the rest of the pack do when it comes to investing. As early as 2002, he had warned of a “time bomb” that was waiting to go off in the US financial market. He had viewed the credit default swaps market as “financial weapons of mass destructions”. And true to his words, today, we are now reeling from the effects of that “time bomb”. The thing is that if we wish to be successful like Warren Buffett or George Soros, we have to adopt their mindset. There is no way to get rich quick. Everyone needs a plan, patience, and an investment vehicle to start with. Things like risk level and tax liability need to be considered and not just the returns. George Soros, uses statistical arbitrage, to hedge his bets whenever he invested in any assets. This way, he reaps a positive return regardless of the direction the market is going. In layman term, this is called riskless investment and it’s not just restricted to financial markets. (To know more read, Sports-Arbitrage – How To Place Riskless Bets & Create Tax-Free Investments). This system of investing was developed by Morgan Stanley Equity trading division during the 1980s. Today, statistical arbitrages have progressed to encompass technological improvements. With the use of software like the ArbAlarm, it is possible for one to execute a trade within mere seconds from the desktop computer.
Apart from the risk level which we have to consider, there is another aspect most of us tend to overlook, that is the tax liability of the returns. Incomes derived from Real estate are subjected to Capital Gain Tax (CGT). Likewise too are the dividends we get from the superannuation funds. Until the superannuation has become your retirement pension, all the returns are subjected to 15 % CGT unlike capital gains made from statistical arbitrages which are tax free. (For more insight, see ATO Tax Ruling TR2004/D17). At the end of the day, we ourselves have to decide how we will live out our retirement years. Many seniors are finding it extremely difficult to survive on the aged pension as many do not have any savings. Even those who have a retirement nest tied in the stock market are finding their returns shrinking day by day as the credit crisis get worse.
As President Bush signed the bailout plan into law, the majority of the Americans are now watching closely the effects of the bill on the financial market. Most of those on main street are afraid to spend as they are unsure whether the bailout plan will work or not. The bailout plan calls for the acquisitions of toxic assets held in the books of ailing financial institutions. The goal is to help unlock the credit squeeze which is gripping the global economy. Under the Emergency Economic Stabilization Act of 2008, the Treasury Department is allocated $250 billion to buy up the mortgages and CDOs. If this amount is inadequate, at the President’s discretion, another hundred billion can be made available. A final $350 billion is also provided for subjected to the US Congress scrutiny.
The entire dominos effect began with the demise of the Lehman Brothers followed by the bailout of American Insurance Group (AIG) by the US Government. From there onwards, for the 3 weeks prior to the passing of the bailout plan, the world’s financial markets had been on a roller coaster ride. The effects were felt globally as stock markets all over world nosedived. Many had hoped for that the bailout plan will provide for a calming effect on the market. However since a week had passed, in a climate of mistrust, Banks are still holding on tight to their cash worried which is the next bank that will collapse. This has prompted shares prices to continue falling, slowly wiping out the values of retirement funds resulting in even less consumer spending. In fact the US president has asked Americans to brace themselves as he warned that the bailout plan will take time to be effective.
Already analysts are warning that more banks are likely to fail by next year. The question on many peoples mind now is how many of these banks will fail and also the manner with which these banks will be disposed off. The reason for this anxiety is due to the dwindling deposits of the Federal Deposit Insurance Corp (FDIC). Under the bailout plan, the liability of the FDIC is increased from $100,000 to $250,000 per account. It follows as to whether there are enough funds to meet the obligations of the FDIC. Granted that the bailout plan will save some financial institutions from insolvencies, a substantial numbers of banks will still face failures as the deteriorating assets which they hold are not covered by the bailout plan. For example, constructions loans are not covered in the list of assets which the Federal Government will take off from the books of ailing banks.
With the turmoil in the financial markets, despite being covered by the FDIC, many depositors are wondering whether their savings are secured. With the failure of Washington Mutual several weeks prior to the enactment of the Emergency Economic Stabilization Act of 2008, this has not aided in boosting confidence in the minds of depositors. The current trend is a flight of money to quality institutions. The problem is that no one really knows which banks are on a strong footing when banks like Washington Mutual, are not even immune to failure.
Although Australia is on the opposite end of the globe, the fallout from the US has not left Australian banks unscathed. Earlier during the year, the National Australian Bank (NAB) was forced to write down 90 percent of its holdings on American CDOs to the tune of A$1 billion. The write down had forced the NAB to cancel its £550 million bond sales by 70 percent as investors shy away from investing in the NAB bonds. In addition analysts are predicting that the NAB will need to further write down an additional A$500 million to A$1billion to cover its losses in the US mortgage investments. Even the Wingecarribee Shire council is not spared from the fallout of the US credit crisis. Like many of the charities and churches in Australia, the council had purchased millions of dollars worth of these toxic assets as investments. A lawyer acting for the council commented that it is unlikely that the bailout plan will benefit the Wingecarribee Shire council.
The New World Order brought about by the globalisation of the world’s economy has resulted in many positive benefits like ever increasing trading among the various nations of the world. Corporations are also able to raise funds easily on worldwide capital markets with lower cost. The unfortunate consequences of a globalised economy are that risks are also amplified even to areas seemingly unrelated to the global economy. Today, because of the world dependencies on the US economy, even its domestic problems have the cascading effects on a local council like Wingecarribee Shire council. Today, investing is no longer a simple and clear cut matter as Money Market Instruments are packed and repackaged so many times that no one know what their real risk levels are despite of their triple “A” rating.
In addition, globalisation has also revolutionised the way Share prices are being determined on the stock market. A company shares used to be determined by the amount of dividends that it paid out to shareholders. Today shares prices bears no relation to its intrinsic value but rather to its earning potential based on forecast. With a little bit of creative accounting like what the previous management of the demised Enron did, a company is able to show earning potential much higher than it actually is able to earn. Secondly, with increased competitions among the market traders, trading margins are becoming increasingly lower. To compensate for the decline in margins, market traders are now resorting to alternative ways to generate revenues. One way which the market traders have gone about doing this is by taking advantage of inherent market inefficiencies. Using a system pioneered by Morgan Stanley’s Desk Trading Operations during the 1980s, market traders are able to use statistical arbitrage to profit for temporary mispricings of assets to gain profits from as low as two decimal points. With computers programmed with algorithmic blueprints, market traders are able to isolate these “mispricings” within a fraction of a second and capitalise on them before the market readjust itself. By the sheer volume of shares traded, hedge funds are able to move the prices of shares which they deal in thus creating the market sentiments.
Due to large volume of shares traded by hedge funds to capitalise these mispricings of assets, they are able to profit by the billions daily. Their profit taking abilities are not curtailed by the direction of the market movements. Regardless of whether the market is moving up or down, hedge funds are able to profit from their trading. Statistical arbitrage is able to remove the element of risk from the equation. Because these computerised systems requires substantial amounts of money to develop and to maintain, these systems are beyond the reach of the ordinary investors.
Nevertheless, Rajeev Shah, former London city stockbroker, pointed out those situations of arbitrages is not just limited to the financial market. In the world of Sports betting, the same mathematical principles of statistical arbitrage can be applied to betting. With an algorithmic computer program called the ArbAlarm, placing bets cease to become gambling but rather as hedging because statistical arbitrage reduces the element of risk to zero. (To know more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”). Furthermore, the profits from Sports Arbitrage are not subjected to tax. (See Australian Tax ruling TR2004/DR17).
Although this is an unorthodox method of investing one’s funds, in comparisons, the traditional model of investments based on shares, bonds and money market instruments are no longer fail safe to fund one’s retirement plans. Of late, returns on superannuation funds are declining with many resorting to the aged pension instead. In additions, brick and mortar are also no longer reliable as place to park one’s money. The collapse of ACR, Fincorp all seek to show that the real estate market is also subjected to manipulations by unscrupulous developers. With the current situation, perhaps it really time that we think outside the box to seek an alternative way to fund our retirement without it being at risk to factors beyond our control.