The perils of fickle forex
ABOUT 10 years ago, the highly volatile foreign exchange market was confined to a learned few. Those dealing in the forex market were predominantly commercial banks and big companies trading for their own books.
In the last five years an influx of investment institutions has entered the market, using foreign exchange not only as a hedging vehicle for foreign assets but also as a profit-making instrument in itself.
Solicited by aggressive forex salespeople and attracted by the potential to make five to 10 times initial investment, the small investor has joined in the foray.
But according to market experts, small investors dealing in the forex market should beware.
Because of the high risks, many investment advisers will advise against entering the market at all.
''We do not recommend it to our clients,'' said Mr David Chapman, senior portfolio manager of Matheson pfc, ''It's very high risk.'' The main reason behind the risk is its high volatility, one which far outstrips most other forms of investment. The passing of a rumour can undress the market in minutes, and fortunes can suddenly be lost.
''Time and money is needed to read the markets correctly,'' said Mr Chapman. And for the small investor, both may be in short supply.
Currently, a number of vehicles exist for the small investor interested in participating in the foreign exchange market. The most visible can be the most perilous: the forex dealer who actively solicits clients.
Not required to register with the Securities and Futures Commission nor with the Commissioner of Banking, the so-called fringe forex dealers have managed to slip through a regulatory crack.
While the Government is currently discussing a proposal which would render the Securities and Exchange Commission responsible for licensing foreign exchange dealers, no such body currently exists.
Even managing your own trading account has its disadvantages. As one forex dealer warns: ''Unless you watch the market, you do not know where it's going.'' Likewise low commissions also can be misleading. To make money from the forex market, trades need to be made. Quite often, several trades will be made on one account within only an hour. In light of this fact, the advertised commission fee of $28 per mini-contract will no longer look as small.
For those still eager to enter the forex market, the best vehicle may be the managed currency fund. Some are highly leveraged, some are not. The risk varies with each.
But even the experts have been known to get it wrong.
From its launch on 1 July 1991 until 19 April 1993, Sun-sun Chan's leveraged forex fund at Sun Hung Kai has lost 69.94 per cent, according to market statisticians Micropal. And that number was computed before taking into account charges for participatingin the fund.
Of course, some managed funds have performed much better. In the last year, Jardine Fleming's managed currency fund has improved about 16.02 per cent, and one of Guinness Flight's Funds has jumped 47.20 per cent in the space of about three years, reportsMicropal.
Used correctly, foreign exchange can be an effective mechanism, particularly for companies wishing to hedge their investments against currency fluctuations. The increased popularity of foreign exchange dealing illustrates the point.
According to a recent survey completed by the Bank for International Settlements, foreign exchange worldwide increased 42 per cent between 1989 and 1992 to an estimated $6.8 trillion per business day in April of last year.