Sports Arbitrage Trading In The News
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.