Comment by cesarb | Hacker News Reader

Comment by cesarb | Hacker News Reader

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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.

> 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.

+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...

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.

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