10/06/2008

Too much financial engineering

The financial crisis is partly caused by too much financial engineering and pushing sophisticated products, instruments and derivatives to the ignorants. The days of govt bonds, FDs, stocks and unit trusts were gone. It is now a jungle out there. These sophisticated instruments are meant for funds and finance trained professionals. They are the ones who traded in these instruments for hedging, arbitraging, taking advantages of market inefficiency and their timely news and network of information. Asking the Ah Peks and Ah Mahs to invest in these instruments and expecting them to understand what they are in for is asking too much from them. In the stock exchange, there all also many derivatives and instruments that are not easy for the average punters to understand. Even the remisiers and dealers will have a hard time trying to manage them and trade these instruments to their advantage. They lack the skills, equipment, softwares and resources to compete against professional fund managers. It is an uneven playing field. The O level students pitting against the PHDs. Training derivatives, with their high risks and leverages, should not be marketed to the average investors. The watchdogs should also spend time looking into these instruments and gauge their usefulness in a market with unsophisticated investors.

4 comments:

Anonymous said...

Seriously, I think most of those who invested in these instruments have really been taken for a ride. Not just the Ah Peks and Ah Mahs.

Sumiko Tan wrote a piece about her experience with such investments and I agree with her. Normally, you get what they promised you in the first year and after that it depends on the performance of heaven knows what, which is always below expectation or they just change the basket of investments and that invariably changes the basis of computing the returns. Thank goodness I never believe them.

Anonymous said...

Redbean;

Anon Oct 03 2008 11:29pm had posted a long comment to your "At the first wrong turn", which succinctly described how the Unscrupulous motivate the victims to enrich themselves.

Financial engineering sounds a lot more legitimate than trickery.

patriot

redbean said...

hi patriot, i read that. a lot of information there.

white collar crimes are bloodless. and they came with golden parachutes as well. such supertalents should not go to waste.

Matilah_Singapura said...

As I said before, the most "guilty" are the punters, not the super-engineers who structure these investments.

It's your money, you can choose to lose it.

People buy stuff they don't understand because they like to GAMBLE —the thought of a "big win" or "something for nothing" (margin trading) is far too seductive.

If no one gave the fund managers the money, the funds in question would cease to exist.

Playing in the market is an honourific i.e. it is voluntary and conditional: You must have the "entry fee" to play. No one owe's you a "right" to play in the market nor does the world owe you an "entry fee". No one forces anyone "into" a market. You go there voluntarily.