Wednesday, November 05, 2008

The "Accumulator".......

Another "innovative" product that is backfiring & will be eliminated very soon..... Being forced to double down ( if you want to spin it you can call it "cost average effect.....couldn´t resist....) in this market on a regular basis is indeed brutal..... But no mery they deserve the losses...... According to the journal this was the cause of the $ 2 billion Loss at CITIC ( see "Cowboy Hedging" Leads To $ 2 Billion Trading Loss.... )

Einmal mehr eine "Produktinnovation" die furchtbar nach hinten los geht und die es zukünftig sicher nicht mehr geben wird..... In regelmäßigen Abständen gezwungenermaßen in eine verlierende Position zu verbilligen ist so ziemlich das Gegenteil von gewinnbringend ( zu meiner aktiven Bank/Sparkassenzeit nannte man das im Fondsbereich bei noch "Cost Average Effekt"..... Vielleicht sollten die in Asien einfach mal die Vermarktung ändern.....). Da auch hier wieder Gier das Hirn gefressen hat hält sich mein Mitleid auch für die Privatinvestoren doch reichlich in Grenzen...... Lt. dem WSJ war auch die Art des "akkumulierens" die Hauptursache für den 2 Mrd $ Verlust von Citic ( siehe "Cowboy Hedging" Leads To $ 2 Billion Trading Loss....)

WSJ HONG KONG -- Amid widespread losses investors have suffered in the global financial crisis, one financial product popular in Asia has surfaced as the culprit behind a painful destruction of wealth for individuals and businesses alike.

Called an "accumulator," it is essentially a contract that obliges investors to purchase a security, currency or commodity at a fixed price -- often set at a discount to prevailing market rates -- at regular intervals. When the market price is above the fixed purchase price, the investor makes money. When it falls below the fixed price, the investor loses, sometimes quite a lot. Contract terms typically last a year.

In Hong Kong, recent losses from stock accumulators have led to dozens of complaints to regulators and legislators from disgruntled investors. Chan Kam-lam, a Hong Kong legislator, says he has heard from 50 or so individual investors, many of whom say they didn't fully understand the risk or blame their private bankers for pushing them into the products. Some individuals he has talked to have lost as much as $25 million. ...

Accumulators are among a number of structured financial products and derivatives that were sold to investors during headier times, when their downside risk seemed remote, but which are now wreaking havoc on private portfolios and corporate balance sheets amid huge volatility in global financial markets.

A fairly new flavor of derivative, the accumulator has led to big losses in some unexpected places. Among them: the books of VeraSun Energy Corp., one of the top three ethanol producers in the U.S., which filed for bankruptcy protection Friday. VeraSun had entered into accumulator contracts linked to the price of corn -- ethanol's key ingredient -- that led to big losses when those prices plunged amid a broader downturn in the commodity markets.

Citic Pacific Ltd., a Chinese-backed conglomerate listed in Hong Kong, recently reported a possible loss of nearly $2 billion, or more, thanks to its investments in a currency accumulator linked to the Australian dollar, which has fallen sharply against the U.S. dollar in recent months. News of the expected loss has punished the stock and has forced the company's Chinese parent to offer a rescue loan package.
Among the hardest-hit victims have been wealthy individual, or "retail," investors who bought stock accumulators in Hong Kong, by far the biggest market for the product, according to bankers. Hong Kong's financial regulator, the Securities and Futures Commission, estimated earlier this year that about $23 billion in accumulators remained outstanding.

What made them so popular? For one, years of rising equity prices and a dearth of fixed-income alternatives in Asia stoked interest in a number of equity-linked derivatives, including accumulators. Many people also appeared attracted by what seemed at first glance to be a great deal: the ability to buy stocks at a discount to the prevailing market price. This enhanced the impression that a bank's private-wealth clients were getting an exclusive offer only available to a select group.

And during the bull run in stock prices, when accumulators were most popular, many investors consistently underestimated the risk of a major, long-lasting downturn in shares that could leave them dangerously exposed.

As investors once enticed by the "discount" on their shares saw their losses mounting, they developed a new nickname for the accumulator: "I kill you later."

"The fundamental flaw with nearly all structured products that were developed is something that I learned from my grandmother: You get nothing for free," says Kathryn Matthews, chief investment officer for Asia at Fidelity Investment Management Ltd., which doesn't operate a private bank or offer accumulators.
Some investors have settled quietly for undisclosed sums with their private banks, according to people familiar with those negotiations. Others have opted to cut losses and terminate the accumulators, by selling them back to private banks for far less than their original purchase prices. Still others are hanging on to those investments, hoping a market rebound will restore ailing account balances......

The accumulator got its start in Europe as a corporate product, designed primarily for companies looking to build stakes in one another without causing sudden spikes in the share price of the target company.

Later, when private bankers began marketing the product to retail investors, the Asian market proved a lucrative source of new business.

Here is how an accumulator might have worked for an investor interested in accumulating a large position in China Mobile, one of the country's biggest telecom stocks.

larger/vergößern
A year ago, China Mobile was trading around 142 Hong Kong dollars (US$18.32) a share. An accumulator might have offered investors the ability to buy 1,000 China Mobile shares every month for a price of HK$114, or 20% below market price. The contracts typically included a "knock-out" clause, which terminated the contract once the stock appreciated 5%, or in China Mobile's case reached HK$149. If the stock reached that level, the return on the investor's outlay was 31%.

But here's the rub: Investors were contractually obliged to keep purchasing the shares at HK$114 regardless of whether they rose or fell. There was another nasty twist: Many accumulators required investors to double down on purchases if shares dropped, buying 2,000 shares instead of 1,000 at a price that now put them in the red.

For the 12-month accumulator, set in November 2007, investors quickly found themselves in this situation, as China Mobile's stock bounced around in the market's volatility. On Wednesday, the company's shares closed at HK$71.60 -- down 37% from the HK$114 purchase price. And because the investor is locked into making more purchases over the life of the contract, he keeps adding to his losses with each purchase.

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3 Comments:

Anonymous Lee Ka Boom said...

Locals in HK refer to this product as "I kill you later".

11:46 PM  
Blogger jmf said...

Moin,

they should have named it this way from the start.....

Here more on currency bets that went wrong...

Brazilian pulp giant Aracruz Celulose SA, which owes more than $2 billion to a group of banks due to soured currency bets, reached a deal that will let it pay off its losses over a number of years.

The deal, between Aracruz and a handful of banks, saves the company from a potentially crippling payment, but will leave it with a debt load for years.

It could take five to 10 years for Arazcruz to pay back the $2.13 billion it owes to the banks, said Itau Securities analyst Marcelo W. de Brisac. Paying off the debt will make it harder for the company to fund investments, limiting future growth. Terms of the repayment will be determined by the end of the month.

"All growth plans are now out the window," said Mr. de Brisac. The company's debt service payments will equal bout 40% of its earnings before interest, taxes and amortizations, he estimates.

12:58 AM  
Blogger m11.in said...

nice and impressible blog.
..................................

10:38 PM  

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