Monday, 16 June 2008

100% return trading CFDs

I phoned CityIndex today to finalise the details on the account I applied for at the seminar last Thursday. I was then able to login to my account to change to password from the initial default value, and I used BPay to transfer an initial $250 into the account. Because I funded the new account within one week of the seminar, I should get a matching $250 put into my account by CityIndex - an immediate 100% return! Of course you can't immediately withdraw the $250 - you have to make a minimum of 10 trades before you can withdraw the "bonus" $250 six months after opening the account. At least the bonus money will give me a $500 account balance to play with - sufficient to make trades with a required margin of around $100. For an Australian stock or Index with a 5% margin requirement that would mean taking a $2,000 position.

It was interesting to see the the CityIndex application pack included forms for opening a CFD trading account on behalf of a superannuation fund. Although the trust deed of our SMSF is probably broad enough to allow 'investing' in CFDs, I wonder how the trustees (DW and I) could justify trading such highly geared instruments within our investment strategy? Rather than purely speculative day trading CFDs, you'd have to execute a much more considered strategy with controlled risk - possibly pairs trading, commodity stripped investment in mining companies, or some such.

I don't think we'll use CFDs as part of our superannuation investments, but I may do some modelling to see 'what if' you used CFDs as a highly geared way to invest in the stock market index. For example, if you invested half you funds in a high-interest online cash account, and used the other half to invest in index CFDs (buy-and-hold, rather than trading), how would you have fared
over various 10-year periods since the 1970s? CFDs have an implicit interest cost of the overnight cash rate + 2%, so I should be able to get daily data for the AllOrds Index and cash rate since 1970. It will be interesting to see how this strategy would have performed in different market conditions, and the effect of the proportion of total funds invested. To much invested in CFDs would probably see your account wiped out by margin calls, and too little would see your fund return remain close to the cash rate.

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mOOm said...

If you trade index futures CFDs there are no interest payments involved, though there are interest and dividend payment streams built into the futures prices.

I find it weird how much regulation and hassle is involved in self managed super accounts in Australia. I've traded options in my US Roth IRA. This is somewhere where the US is ahead of Australia in making things simpler.

Ultra High Net Worth said...

The regulation of super funds is historical, but in many cases very necessary. I work in the industry (I'm an accountant) and have seen too many SMSF funds wiped out because of inappropriate investments. There was a product similar to that sold by Opes prime for superfunds and, while it bordered on the edges of legality (probably was), the accounts have now been mostly wiped out.

CFD's are too highly leveraged a product to use in superfunds. Your superfund is the one asset that can't be touched by divorce, bunkruptcy or other legal action. Protect it and when you get old, be thankful.