Eyes Wide Open
So, as a private investor, not a full blown opted up professional investor but a private retail client, you can indulge to your hearts content in the trading of Foreign Exchange spreads (with eye watering levels of leverage available), you can trade equities via CFD (again leveraged up if required), and you can, still, lend money via the mini bond market to anyone or thing that appears to have a plausible investment offering. You can entrust your life savings to a pension provider who will invest in global equities, bonds and even highly illiquid venture capital type underlyings meaning you are very, very long risk assets and at the complete mercy of global market sentiment (something brought into sharp focus over the last few days).
What you cannot do, however, is invest in a hedge fund. They are dangerous.
So, what is the solution?
Ultimately regulators are mandated to provide as much protection as possible via the regulatory framework but this is in a way in conflict with giving people the widest set of choices possible. There has been some progress on this front with the advent of UCITS vehicles, but they are also very restrictive in terms of what assets can actually be held within those wrappers such as restrictive covenants on holding commodities and shorting stocks. These restrictions in turn have encouraged the creation of derivative products (total return swaps) which are deemed suitable for inclusion in UCITS structures, and mimic or mirror the returns on those restricted assets but also cost more in fees than simply investing in the initial asset in the first place. Clearly, this neither benefits nor protects the retail customer at all! Similar examples exist elsewhere such as in the corporate bond world where access to the markets (primary and secondary) have historically been restricted to larger institutional players. There are now FinTech disruptors helping to open up these once closed markets to the retail customer by way of a platform, a sort of “class action” type model. The same is happening in equity Initial Public Offering world, you can now use a platform to participate in the IPO market, a market that used to be totally closed except to the big institutions. Similarly, there are Exchange Traded Instruments traded on mainstream European equity exchanges that replicate the performance of a hedge fund strategy giving retail investors the opportunity to invest in a Cayman domiciled fund as if they were a high net worth or semi institutional investor. Power to the people!
It is quite obvious that imaginative solutions (trading on swap, leveraged ETFs, exchange traded commodities) are being employed to gain exposure to sophisticated strategies for retail clients and, equally there is strong demand for these products but the barriers to entry for the retail investor base is incredibly high. Should we not simply allow the retail customer to play on the same pitch as the institutions? We have already seen that regulation has not been able to stop or even catch events such as those similar to Woodford whose investment strategies ticked all the boxes as “safe”.
Why not allow platforms that adhere to a regulatory framework (similar to a KIID for UCITS) to simply distribute alternatives to the retail base… this is certainly no more risky than the above!
