Illogical returns of forex schemes

THE number of people who have placed their money in foreign exchange (forex) schemes in return for double or triple-digit returns is simply mind-boggling.

In recent times, the topic at most social gatherings is about the whopping returns that the forex schemes are dishing out to their investors. It is said that the returns range from 100% per annum to more than 250% per annum.

The returns are indeed stupendous, provided the scheme is sustainable for the longer term. Insightful investors know guaranteed returns of triple digits per annum with the capital intact is certainly not tenable.

Perhaps, prospective investors and those who are already in the schemes should ask themselves a few basic questions before placing their money.

They can start by questioning the investment strategy adopted by the managers of the forex schemes in order to generate a double-digit guaranteed return on the amount invested every month.

As far as capital markets are concerned, steady risk-free returns only come from mundane investments such as fixed deposits. The going rate now in Malaysia is less than 4% per annum.

Even the world’s top hedge fund managers, who normally put their money in the forex market, are not able to generate double-digit returns, let alone provide any guarantees to their investors.

According to a survey by LCH Investments, the world’s top-20 hedge funds returned only 3.2% in 2015. In absolute amount, the top-20 hedge funds made a return of US$15bil on an investment size of US$465bil. The top-20 includes the famous Quantum Endowment Fund managed by George Soros.

What is startling is that hedge fund managers outside the top-20 lost US$99bil for their clients.

Forex trading is a high-risk investment with the potential of high returns and heavy losses. Nobody makes money every year. There are good years and bad years. Clearly, 2015 was a bad year for the hedge funds.

Hence, how can forex schemes guarantee their investors returns every year?

The second question to ponder on is the generosity of the scheme promoters in sharing their good fortune.

Banks generally do at ultra-low interest rates. In Malaysia, the borrowing rates are between 4.5% and 8% and it depends on the credit profile of borrowers. In other countries such as Singapore or Japan, it is so much more less.

If an investment generates more than 100% return and the cost of borrowing is hardly 8% at the most, it is only logical to question why are the promoters sharing their pot of gold with a large number of people and not making all the money for themselves?

Thirdly and finally, investors should ask themselves why established funds such as the Employees Provident Fund (EPF) is not putting its money in forex trading instruments.

The simple answer is forex schemes generally do not have underlying assets. For instance, there are no stocks or property to back up the investment.

It is a highly leveraged game where the capital can be wiped out. So, it does not fall into the asset classes of investments that the EPF would undertake.

There are three types of forex traders. The most common ones are those who deal with the requirements of companies for forex currencies in their course of doing business.

The second category is known as market makers where they cater for banks and large financial institutions. Minimum trade normally is US$3mil.

The third category is proprietary traders who go into the forex market to make money for themselves or the fund they work for. Personalities such as Soros fall into this segment.

The constant in all three types of forex traders is nobody makes double-digit returns consistently or provide guarantees.

There are various schemes and most offer returns of more than 100% over a period of one year, something that even the best of hedge fund managers are unable to achieve.

The forex schemes are a stark reminder of the gold investment schemes that sparked a craze four years ago.

Investors of Genneva Gold still rue their losses. A retired teacher parted with her entire gratuity money of RM130,000 to invest in a gold scheme managed by Genneva Gold, despite being advised against it by her close friends.

A few weeks later, the Genneva Gold office was raided and the authorities carted away cash of RM99.8mil and seized gold amounting to 126kg. Investigations revealed that the liabilities or amounts owed to investors exceeded 10 times more than the amount seized.

Put simply, what they are saying is that although the company had collected a staggering RM1bil, only 10% of the amount was seen when the raid took place.

In addition, more than 8,000 customers of the company had paid for the gold leaf but not received it. Also, thousands have surrendered their gold but have not received their cash reimbursements of RM80mil.

According to the authorities, the company sustained its operations mainly on new monies coming from new clients. When the new clients dry up, the operations will run short of cash and redemptions would be a problem. The investments involving forex schemes are bigger and growing fast. And the most alarming part of it is that the authorities are unable to do much to prevent its rapid growth because the company receiving the money is normally based overseas.

Bank Negara can only advise people on the risks and hope they can learn from past episodes such as Genneva Gold.

However, the cautionary words seem to have fallen on deaf ears so far. Now, the promise of guaranteed returns and huge profits is music to many.

The music will stop when some are unable to get their principal, or the monthly guaranteed sums stop coming. Only after that will investors wake up.

The damage would surely run into billions and those who went in last will bear the brunt of it and will only have themselves to blame.