Hacker News Reader

Comment by rwmj | Hacker News Reader

All you need to know is the website claimed: "It made trading decisions for investors and guaranteed their principal."

View on HN

Legitimate funds like that do exist. I took a look at one of the biggest banks on my country, and found five "protected principal funds" (if you can read Portuguese, it's at http://www.bb.com.br/portalbb/page3,116,2198,1,1,1,1.bb?codi...).

There are several caveats. According to what I read on that page, these funds use a combination of derivatives and fixed income to protect the principal. On the "risk factors" part, it says the principal cannot be guaranteed if you get out of the fund early; even if you wait until the end and get back the principal, it won't be adjusted for the inflation (6.5%/year and growing); and you always have to pay for the fund administration (1.5%/year for the fund I'm looking at).

Of course, the average return for these kinds of funds will be less than the return for funds which do not guarantee the principal. A quick search found an article (http://www.valor.com.br/valor-investe/o-consultor-financeiro...) with a comparison between one of these protected capital funds and a balanced stock/fixed income fund (last graph in the article). Most of the time, the balanced fund won.

So, guaranteeing the principal is not a red flag. What should have been a red flag is the return rate: 1%/month is too high, even more it they are guaranteeing the principal (which should decrease the expected return). High return rates tend to be correlated with higher risk.

Well, it also matters that this was a black-box "trading strategy" in foreign exchange markets. Investing money into stocks and bonds, and then buying protection on the principal (the fund administration fee is what compensates the bank for guaranteeing the principal, after all) from a bank with low default risk is quite a different thing altogether. Good point, though.

High returns with no loss is a massive red flag. Principal protected notes do exist but they are financially engineered to provide you with the smallest return possible while charging a hefty fee for the bank which creates them.

+1. In Spain BBVA, one of the biggest banks in the world [0], offers a principal-guaranteed fund that tracks 3 major stock symbols in different industries.

Of course, ROI is capped at 2% with a minimum 1yr commitment.

[0]: https://www.gfmag.com/awards-rankings/best-banks-and-financi...

> 1%/month is too high

Yes, and they advertised 1%/day

How anyone could possibly believe that I don't know

That was a typo, I meant 1%/day.

In my country, there are safe investments with guaranteed returns of over 12%/year (prefixed federal bonds). For instance, if you buy a LTN 010118 right now, it will return 13%/year (before taxes) when it expires on 2018-01-01 (the current buying price is R$ 684,17, it gives back exactly R$ 1000,00 when it expires).

Of course, that's if you don't look at the inflation. With inflation currently at 6.5%/year and rising, the true return is more like 6.5%/year before taxes, and more like 4.5%/year after the 15% tax on investment gains above 2 years. So yeah, if you do consider inflation, 1%/month is too high.

This exists, but it would be better if it didn't.

Variations of this kind of guarantee are a big part of what whacked the financial services market. It's black swan risk. Unlikely to happen, but big when it does.

These maneuverings to "reduce risk" are not really reducing the risk fully. Some of what they are doing is aggregating normal risk into long tail risk. Instead of 10% chance of a 10% loss, they turn it into is a 1% chance of a 100% loss. This new 1 in 100 risk is a sort of dark matter that the financial system produces. No one knows where it is and it doesn't get fully priced into financial products. In the event of the risk materializing, who knows where it ends up. Every liability is ultimately limited by bankruptcy laws and/or the reality of not having the assets to cover an unlimited liability.

Even when most sober financial institutions advertise limited risk investment, one eyebrow should go up.

Absolutely. Combine this with "The site said investors had averaged net gains of 1 percent each trading day during the past five years" and you have a giant stop sign.

I am always surprised when I read stories like this. They've lost 2000 pounds and the next thing they do is invest 60.000$?

This is a good example why we need more financial education in school.

I'm not sure what financial education would do here. The people in the article, some of whom were medical doctors, surely knew how percentages work, how probabilities work. What else exactly did they need to be taught, in school, university, and medical school? I'd say they needed more (at least some) common sense.

Sometimes common sense has to be taught. Of course they do know how percentages, probabilities and so on work. But they fail to do so when it comes to money. I actually doubt that this is (in most cases) due to greed. Many people just don't have a feeling for the relation between risk and promised reward.

Not sure, I think it is greed related. People assume that money creates more money just like that. One person in the article didn't trust banks post crisis. I guess people do assume that the financial services business makes vast amounts of money out of money, rather than largely just taking proportions of said money away.

surely knew how percentages work

Not even close. A 1% daily return is science-fiction.

> Not even close. A 1% daily return is science-fiction.

Not really. In 1990, the most common kind of "savings account" used here (caderneta de poupança) had one month with over 80% returns. That's a bit more than 1% daily return, for an investment almost everyone could (and did) have.

Of course, that year the inflation was over 1000%/year...

For every rule there is an exception. Grandparent could be restated as a 'return that is more than a certain percentage over inflation' and it would hold water against your exception.

Cue the next exception and so on. The point is that such high returns are a huge red flags and absent any explanation for them you should be extremely wary and probably just assume that it is a scam until you've proven otherwise.

Actually, a lot of medical doctors and "professionals" do not really know how probabilities work. For more on this, refer to Gerd Gigerenzer's Risk Savvy: How to Make Good Decisions. http://www.barnesandnoble.com/w/risk-savvy-gerd-gigerenzer/1...

His "reckoning with risk" is an excellent book. As an example: http://imgur.com/zO4zkl4

Edit: and a review http://plus.maths.org/content/reckoning-risk

Doctors are known for being terrible with money. There are a bunch of investment services especially catered to doctors to help them invest their money. Of course, these are generally rip offs compared to paying $100 a year for a fee based investment plan. But they are better than nothing.

It's not a question of education. I've seen very intelligent people fall for these scams. It's a question of greed. Once your eyes light up with dollar signs, there's no convincing you that it's a bad idea.

And averaged 1% return a day!

It is essentially the same as payday loans. No one would pay thousands of percent interest but when framed different people take them up.

It's actually the opposite of payday loans. For example, if someone were to take a 1 month loan for $200, at 15% monthly interest, then they would pay $230 at the end of the month.

In the UK at least, loans must quote an Annualised Percentage Rate (APR), which is the IRR (Internal Rate of Return) over a year. So, any adverts or contracts for this 1 month loan would have to show prominently '435% APR'.

The loan is framed as '435% APR', when in fact you're paying $30 for a $200 1-month loan.

Reply on news.ycombinator.com