Alternative Equity Investment

Once upon a time, before the Internet and before globalization of the financial sector, investment for most people meant buying stocks, shares or collective investment units through a broker, using the mail and the telephone.

You can still do it that way, but more and more people, especially globe-trotting expatriates, do it on-line, and do it for themselves using a whole zoo of techniques in which direct ownership of underlying shares is just one solution, and no longer the best in many situations.

Trading methods now encompass Contracts For Differences (CFDs), Spread Betting, Equity and Financial Derivatives (Futures and Options), and Exchange Traded Funds. Even in plain vanilla equity investment, the one-time focus on national bourses has given way to a wide variety of tradeable markets, on or off the Internet, including so-called 'offshore' stock exchanges.

In this feature, we will review the progress and uses of some of the newer ways of trading and investing, paying attention as well to tax, which is a major issue for many investors and underlies the development of many of the newer techniques, particularly in jurisdictions which cling to stamp duty, such as Ireland and the UK.

Contracts For Differences (CFDs)

Share CFDs (they are also used to trade other instruments such as currencies) are an agreement to exchange the difference in value of a particular share between the time at which a contract is opened and the time at which it is closed. CFDs mirror the performance of a share or an index; they are traded on margin, and profit or loss is determined by the difference between the buy and the sell price.

Because contracts for difference trade on margin, investors only need a small proportion of the total value of a position to trade. CFDs mirror rights in the underlying shares; thus the owner of a share CFD will receive cash dividends and participate in stock splits, rights issues or takeover action.

CFDs have grown enormously in popularity over the past seven years, particularly with hedge funds, and are thought to underlie 30% of the LSE's trading. The majority of major brokerages now offer these products to individual traders via internet trading platforms, giving instant access to quotes and other information pertaining to the market. However, individual investors often use spread betting (see below) rather then CFDs.

CFDs, which were launched on the market place in 1998, have a number of advantages. Firstly, they allow individual traders the opportunity to take larger positions in equities than might otherwise be the case through the use of leveraged margin accounts. In many cases, the margin requirement may be as low as 10% of the full transaction value. So, for example, if an individual wanted to buy 10,000 of ‘Company A’s’ shares and their broker was quoting a price of $1.00, they would put up an initial margin deposit of just $1,000, instead of having to fork out $10,000 to buy the shares outright. If Company A’s share price subsequently increased and the shares were sold at a price of $1.20, a profit of 0.20 per share, or $2,000 would be the result. Not a bad return considering an initial outlay of only $1,000 was needed! The other major advantage CFDs have over standard share dealing is that they allow the investor to sell ‘short’ a company’s share, so that profits can be made on the falling value of stock prices.

However, where leverage has the potential to deliver handsome returns, it can also hit one with nightmarish losses, and the reverse of the above coin is that you could equally have lost $2,000 for just a $1,000 stake if the share price had fallen by 20 cents per share. Traders can protect their downside risk to a degree by placing a stop loss order. This is an order placed above or below the entry price (depending on whether one is long or short) at a point of the maximum loss the trader is prepared to take, and is usually automatically triggered when the security reaches that price.

Because of the risks, CFD trading is highly regulated in a bid to protect the smaller investor from any unscrupulous broker. Therefore only traders deemed knowledgeable enough about the markets in which they are trading and the risks involved in trading via a margin account are permitted to open CFD accounts, making them an unsuitable investment instrument for novice traders.

CFD providers fall into two main categories, those that act simply as agents, hedging all CFD orders in the underlying cash market, and those who make markets in CFDs, living off their own spreads. Obviously, there are hybrid types as well; but an investor may get the best prices through the first, 'agent' type of intermediary. There are many other considerations, obviously, including depth of research coverage, trading strategies and technical analysis. The technical capabilities of the trading platform are very important, especially for frequent traders. The credit rating of the provider is also an issue.

For those suited to take the plunge, CFDs have certain tax advantages, depending on the jurisdiction where they are being traded from. For example, CFDs are exempt from share stamp duty in the UK, Ireland and some other countries as the underlying shares are not physically owned by the investor. However, profits may be liable for capital gains tax. Other costs to take into consideration are broker commissions, which are typically charged at a rate of 0.2%. While this sounds small these costs can soon rack up if frequent trades are placed.

CFDs are predominantly used for short-term trading and a comparison must be made between the savings made from not paying stamp duty and additional costs, including financing. It's not easy to make comparisons, since leakage from poor pricing can easily wipe out tax advantages. However, for trades that are less than three months it is normally cheaper to trade with a CFD rather than with the underlying stock.

In the UK, CFDs also have their uses in position-building, since until 2006 they were not covered by FSA disclosure rules (the Takeover Panel however does include them in its calculations). Ireland is likely to follow the UK's example. But disclosure is one thing, takeover rules another. Most rules governing behaviour during a takeover are based on beneficial ownership, and it would be tought indeed to extend compulsory offer rules, for instance, to shares which were merely the subject of derivative or cfd interests. The UK will probably have a go at it, and the EU's MiFID directive will also be relevant; but it must be doubted if any workable set of rules could be designed.

The Financial Services Authority (FSA) finished consulting on CFDs in February, 2008, but incoming director Hector Sants went on record as saying that it could be difficult to shift from a regime of ownership disclosure based on voting rights to one based on economic interest. "It is an easy statement to make, but very difficult to implement," Sants told reporters after the FSA's annual meeting. He said any change would have to pass a cost-benefit analysis and be practicable, and could not come into effect before later in 2008.

Finally, on 3 March 2009, the FSA published a policy statement announcing that it would extend, as from 1 June 2009, existing disclosure requirements applying to shares 'to require the disclosure of positions held through any financial instrument whose terms are referenced, in whole or in part, to an issuer’s shares and which gives rise to a significant long position on the economic performance of the shares, whether the instrument is settled physically in shares or in cash'. This definition includes CFDs, naturally.

The tax advantages of CFDs in Ireland and the UK are also under threat. In March, 2006, the Irish Inland Revenue, which collects 1% stamp duty on stock exchange transactions, said it was planning to extend the tax to CFDs. But technical difficulties, plus strong protests from Irish Stock Exchange officials, may have persuaded the Revenue that Ireland's CFD business, which is said to underly €3bn a month in trading on the Irish exchange, would simply decamp to London if the tax is imposed. Either government could legislate to tax CFDs in all kinds of ways, but the direct application of stamp duty might well be knocked down by the courts.

In any case, the financial sector thinks that stamp duty on shares is an antiquated and anti-market tax which can only damage the future of the UK and Irish stock exchanges, and would like to see it abolished.

No doubt the UK's HMRC is watching its Irish brother's campaign with the greatest interest. The UK Treasury is not good at abolishing taxes, but is noted for its ability to invent new ones.

Although CFDs got their start in the UK because of stamp duty, they have been taken up in other parts of the world due to their convenience and flexibility, particularly over the Internet.

CFDs are currently available in Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, Thailand, New Zealand Hong Kong and Sweden. CFDs are not available in the US, due to SEC restrictions.

The Australian Stock Exchange launched exchange-traded Contracts for Difference in 2008, making it only the second exchange to have listed CFDs after London. CFDs have shown astonishing growth in Australia since they were introduced a few years ago.

The EU's MiFID directive, which came into force in late 2007, could have threatened CFD trading in EU member states' markets because of its best execution rules. Countries with established CFD sectors, such as the UK and Ireland, will probably try to find a way around the difficulty of ensuring best execution for 24-hr on-line trading, but countries like Germany and France which might see their lucrative national stock exchanges invaded by Anglo-Saxon CFD traders will probably try to hold the line. The result could be to drive the entire CFD sector offshore, which would be good for offshore exchanges such as the Channel Islands exchange based in Guernsey, but eventually disastrous for land-based national stock exchanges.

No EU member states have yet responded coherently to the requirements of MiFID as they apply to complex financial instruments such as CFDs. As of early 2009 it appeared that the countries with established CFD markets were likely if anything to be able to benefit from MiFID by exporting their techniques into other EU markets, by-passing previous restrictions.

Spread Betting

This has also become a very popular way for smaller investors to take a punt on the stock market, and the number of firms now catering for this form of investing has grown markedly over the past five years. The internet has also made spread-betting cheaper and more accessible to investors.

The tax advantages of Contracts for Differences also apply to spread betting, since the bettor has no ownership interest in the underlying securities. Of course, in many cases, there is no underlying security. As with CFDs, spread betting began in the UK, but has spread (sorry!) to other markets. The UK's new gambling legislation, which came into force in September, 2007, makes it easier for providers of spread betting to advertize and operate in the UK, and will probably encourage further development of the sector.

Put simply, spread betting allows an individual to bet on whether a company’s share price, or the value of a stock index, will rise or fall above or below a price quoted by the spread betting firm. In a typical example, the firm will make a quote for the price of a market or instrument at some point in the future. So, for example, the firm may quote a bid/offer (selling/buying) price for Company A’s shares of $1.00 - $1.05 at the end of a day’s trading. If the bettor thinks Company A’s share price will finish the day higher than this price, he would buy, or go long, at the offer price of $1.10. If the trader is right, and the share price ends the day at say, $1.20, he will have obviously made a profit on the bet. The level of profit will depend on how much money the trader has risked per one point movement in the share price. If he bet $10 per point, his profit would be $100 ($10 multiplied by 10 points). Conversely, if Company A’s shares had dipped during the day, and finished at $0.95, the trader would have made a loss of $150.

Spread betting gives the individual a lot of flexibility at a relatively low cost in terms of commissions and tax. It also allows small investors the opportunity to trade a wide range of financial instruments ranging over stock indices, currencies, interest rates, commodities, and options. Most spread betting firms also offer an alternative to conventional fixed-odds betting on sports and other events. In fact, many brokers now offer the whole range of the above services, from CFDs through to futures and spread betting. However, all of these forms of investment are fairly high risk and not suitable for the inexperienced investor. Therefore, they are also probably not the right choice for the passive, more conservative longer-term investors.

In January, 2006, the UK's Financial Services Authority (FSA) announced that it had fined prominent spread-betting firm Cantor Index Limited GBP70,000 for running a misleading campaign promoting spread betting.

The financial services regulator criticised a Cantor advertising campaign entitled 'Free Xda' for Cantor Mobile, the firm's new spread betting device.

According to the FSA: "The promotional material, which included flyers handed out at London stations, posters and advertisements on television and in the popular press, did not contain adequate warnings about the risks of spread betting and consequently put a large number of potential customers at risk."

One of the key risks of spread betting is that if a spread bet position moves against the customer they can lose far more than their initial deposit, and although the firm's terms and conditions contained risk warnings which the customer had to agree to before they could spread bet, the risk warnings were not deemed to be sufficiently prominent by the FSA.

The regulator also suggested that the structure of the offer of a "free" combined handheld computer and mobile telephone known as an "Xda" provided a strong incentive for consumers to spread bet.

Added to this, the service was promoted in a way that attracted the attention of relatively less experienced investors, and the firm did not consider the greater potential risk posed or take appropriate additional steps to ensure that those investors understood the risks associated with spread betting.

Speaking with regard to the advertising campaign, Anna Bradley, director of the Retail Themes Division of the FSA announced that: "Cantor Index should have paid more attention to the greater potential risk posed to less experienced investors and the greater need to ensure that the risks associated with spread betting were likely to be understood by them. This should have been done through robust systems and controls."

However, the Financial Services Authority did acknowledge that no Cantor Index customers suffered any unreasonable losses as a result of the advertising campaign, and praised the remedial action since taken by the spread betting firm.

Equity Derivatives

Another tool offering flexibility to individual and institutional investors alike is the derivative. Trading in stock futures, for instance, can be found through a number of exchanges globally, and, increasingly, through the Internet. Although futures are perhaps more readily associated with the commodities or fixed income markets, where traders or companies have traditionally tried to hedge against adverse price swings, stock futures can perform the same function as contracts for differences. They are thus useful for individual investors who want to undertake stock trading without actually having to physically buy or sell the stocks. Basically, buying shares on the futures market means that the buyer agrees to buy or take delivery of the shares at a future date, but paying the current price. Most futures trades are cashed out before this delivery date, meaning that the underlying share or instrument never actually changes hands. As with CFDs, they are also traded on the principle of margin, so, again, there is potential to take a large position in an equity without having to put up the requisite amount of cash.

There is also the added flexibility that multiple trading strategies can be employed (as with most other equity derivative contracts), such as combining long and short positions with a holding in the underlying shares, and the use of options, which confers on the trader the right, but not the obligation, to buy and sell share futures when they reach a certain price (known as the strike price). Options can be employed in many different combinations, and themselves be bought and sold. However, option strategies have defeated even Nobel-winning economists, so inexperienced traders may want to start with the simplest of options strategies where derivatives are concerned!

Stock Index Futures

Another slightly more esoteric and less direct form of alternative equity investment is buying and selling stock indices in the futures market. While stock index futures have been on the investment map since their introduction in the early 1980s, they have only recently appeared on the radar of the smaller investor thanks in large part to the growth of internet trading and the rise in popularity among private individuals of day trading. Again, stock index futures were developed as a hedging tool for institutional traders to provide protection against a price reversal of the stocks in the manager’s portfolio. However, stock index futures also provide an opportunity to make smaller short term gains.

The principle of trading in stock index futures is the same as any other futures market, except that the trader is effectively buying and selling a set of numbers, and no physical delivery of an underlying asset is possible. This means that positions are settled in cash at the expiration of the contract at either a profit or loss, although the vast majority of index futures contracts are either settled prior to expiry, or ‘rolled over’ to a later expiry date.

The value of a stock index contracts is fixed by the exchange upon which the index is traded. One of the more popular (and most expensive) indices to trade is the S&P 500, where each point has a fixed value of $250, and where quick profits (and losses) can be made. So, say the index is valued at 1,000 points when it is bought, one S&P futures contract will be worth $250,000. If one contract is bought on a 10% margin, the trader must put up $25,000 to initiate the position. If the index swings by a relatively brisk twenty points during the rest of the day, the trader has the potential to gain, or to lose, $5,000 in one fell swoop ($250 multiplied by 20 points). Clearly, such trading is not for the faint hearted or light of pocket! However, recognising that there is considerable demand for this type of trading among smaller investors, ‘e-mini’ contracts (‘e’ denoting that trading is electronically driven) have been developed on some exchanges where the index is otherwise prohibitively expensive or too risky for small traders. The S&P 500 e-mini contract is worth $12.50 per quarter of one index point, meaning that one contract is worth $50,000 if the index is valued at 1,000 points, so a 20 point swing represents a loss or gain of $1,000. It is worth mentioning that not all indices are as expensive to trade as the S&P 500 or Nasdaq 100. For instance, FTSE 100 index futures, traded on the London International Financial Futures Exchange (LIFFE) are worth £10 ($18) per index point.

Stock index futures, like many derivative equity products, originated in the US, but by now they are available from almost all large equity trading centres. China is one of the few major trading centres not to have enabled stock index futures. In 2007, the China Financial Futures Exchange published draft trading rules for the country's first stock index futures, but volatility in Chinese markets and the world-wide financial crisis have held back their launch. As of March, 2009, the authorities remained uncertain as to the eventual launch date for stock index futures. When trading does begin, it will be based on an index of the 300 largest firms by market capitalisation on the Shanghai and Shenzhen stock exchanges.

ETFs

Exchange Traded Funds are a relatively new addition to the equity investment sphere. An exchange-traded fund is an investment company with shares which trade intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker just as they would the shares of any publicly traded company.

ETFs were first introduced in the USA in 1993 and in Europe in 2000. Currently, there are over 1,050 ETFs listed globally with over EUR522 billion (US$713 billion) assets under management. In Europe there are over 364 ETFs available with assets under management of approximately EUR82 billion. By 2011 it is widely forecast that assets in ETFs globally will exceed EUR1,500 billion.

ETFs were first developed in the early 1990s as a means of giving investors access to a basket of stocks at a low cost. ETFs first began life in the United States, but have slowly caught on in other areas of the world, notably Europe, and they are also making headway into the Asian markets. ETFs are usually linked to a particular index, for example the Dow Jones Industrial Average, the Standard & Poor’s 500, or London’s FTSE 100. They may track a certain sector within these indices, like, for example, technology companies, mining companies or pharmaceutical firms, but they do so within a single share. ETFs have also been developed that track company sectors across different exchanges in a certain geographical region, for example, Western European technology stocks. This gives investors the chance to diversify their portfolios by taking exposure to international equities that may have been off limits to smaller investors through complex cross-border regulatory concerns. ETFs are also making headway into territories where equities were previously inaccessible to smaller investors, such as China.

On the surface ETFs appear very similar to mutual funds, but in actual fact, there are a couple of key differences. One of the main differences is that ETFs can be traded openly throughout the trading day, unlike mutual funds which can only be redeemed at the closing price of each day. This means that ETFs may be equally suitable to the more conservative buy-and-hold strategist, or the more active trader looking for short-term speculative gains. The other major advantage of ETFs over their mutual fund cousins is that the former can be sold short, whereas the latter cannot.

Furthermore, costs are also much lower for ETFs, varying between 0.1% and 0.2%. This compares to average mutual fund fees of around 1.4%, while unit trusts charges can be as high as 1.75%. ETFs are also generally more tax efficient than standard mutual funds. On the other hand, frequent intra-day trading of ETFs means that costs will increase the more an individual trades. As with direct stock purchases, investors must also absorb the bid/offer spread, meaning that an ETF may have to be bought or sold at a higher or lower price than desired. So, as with any other security, there are many considerations for the investor to weigh up when choosing the construction of a portfolio.

There is an extensive and growing range of ETFs. In the United States, most ETFs trade on the American Stock Exchange (AMEX). The largest and most popular among them include the S&P 500 Index Depository Receipts (known as Spiders), the Nasdaq 100 Index Tracking Stock, otherwise known as QQQ, and the Diamonds Trust, which tracks the top 30 stocks on the Dow Jones Industrial Average. On the London Stock Exchange there are 14 ETFs known as ishares which are marketed by Barclays Global Investors, tracking both the FTSE 100 and the broader FTSE250 indices, the top 100 European firms, the Dow Jones Eurostoxx index, the S&P 500 and Japanese shares.

Most European exchanges have ETF offerings. For instance, the total number of ETFs listed on the Swiss Exchange (SWX) rose to more than 100 from ten different issuers after Deutsche Bank listed 13 new Exchange Traded Funds on the Swiss Exchange (SWX) in August, 2007.

Deutsche Bank said that as part of its offering, investors in Switzerland will be able to benefit from falling markets for the first time. The bank is launching the first ETFs in Europe on the DJ EURO STOXX 50 Short Index, ShortDAX and DJ STOXX GLOBAL SELECT DIVIDEND 100 Index, the latter two which are exclusive to Deutsche Bank. This complements the ETFs that were launched on the DJ EURO STOXX SELECT DIVIDEND 30 Index, S&P CNX Nifty (India) Index and eight other Emerging Market indices the previous month.

“With these two ETFs on short indices Deutsche Bank offers investors in Europe the possibility to participate via a ETF 1:1 on falling markets for the very first time. Hence investors will be now able to bet on falling markets or hedge entire portfolios without having to use derivatives,” said Thorsten Michalik, Head of Exchange Traded Funds for Deutsche Bank.

The 21 db x-trackers ETFs belong to a series of 49 outstanding Deutsche Bank ETFs in Europe. With those 49 outstanding ETFs Deutsche Bank is the third biggest ETF provider in Europe, measured by the number of ETFs. The new db x-trackers ETFs cover indices on different asset classes – equities, bonds, cash market, credit and commodities.

Deutsche Bank says that the growth of the ETF market in Europe reflects the strong demand from private and institutional investors for passive investment instruments that are attractively priced and easily accessible. DB x-trackers ETFs are already available to retail investors in Germany through monthly savings plans.

Some 51 ETFs from two new and five existing issuers have been listed on the SWX this year alone, almost doubling the choice of products in the ETF segment since the start of 2007. ETF trading volumes were also 55% higher in the first half of 2007 than in the same period in 2006.

Alain Picard, Product Manager of ETFs & Other Financial Products at the SWX & virt-x, observed: "ETFs are becoming more and more popular in Switzerland. These flexible, low-cost products meet the varied needs of private and institutional investors alike. The choice of products in various asset classes, such as equities, bonds and commodities, is growing all the time. These new ETF will give investors access to even more regions, sectors, investment styles and strategies."

ETFs have recently been joined by ETCs (Exchange Traded Commodies); both types of security saw dramatic growth in terms of trading volume in 2008.

Ethical Investing

Although ethical investing does not strictly fall into the alternative category, it can be nevertheless be viewed as an alternative to the standard equity portfolio or mutual fund. Ethical investments come in a variety of forms, and tend to differ depending on the shade of ‘green’ that an individual wants with their investment.

There are two basic routes into ethical investing: pick the stocks yourself based upon your own beliefs and ethical principles; or put your money (and faith) into a managed fund which only buys stocks in certain companies depending on the pre-defined rules the fund has set itself. Naturally, if one chooses not to invest in certain firms because of the products they make, or because of the negative side effects they have on the environment or health, then this excludes a large number of potentially high growth stocks from a portfolio - for example, firms in the alcohol, tobacco, armaments, oil and gambling industries will be off limits, leaving a limited choice of companies in which to invest. As a consequence, many feel that ethical funds will never match the returns of conventional equity investment funds over the long-term.

Nonetheless, in spite of these self-imposed restrictions, ethical funds have performed comparatively well in recent years. One example is the Stewardship Growth Fund, the UK’s first ethical fund which was launched in the mid 1980s amid much scepticism over its prospects. Twenty years on, the fund manages £600 million ($1 billion) and was ranked in the top fifty of the 276 funds in its sector over the last three years. Detractors argue that ethical funds have performed well because they are weighted towards small and mid-cap stocks, which have generated good returns over the short term. However, there is clear and growing demand for ethical funds and investment products, as indicated by a recent Mori poll, which showed that two-thirds of clients wanted independent financial advisors to offer ethical investment options, so there appears to be enough belief in ethical investments to make them a viable alternative.

If one wants to make an ethical investment, it pays to do a bit of due diligence beforehand, as some funds, and some companies, may not be as green as they seem on first inspection. Advocates of ethical investment recommend that prospective investors study a fund or company prospectus carefully before deciding whether it will be a suitable investment that matches their own ethical principles. To be doubly sure, some advise investors to obtain a written statement from the fund or company clearly stating its investment policy or business activities.

Islamic Investment

Another route into the ethical investment universe is through the rapidly-growing Islamic investment industry. Investments constructed along the principles of Shariah law automatically screen out companies deemed to have a harmful effect on society or that are anathema to the Islamic religion, for instance those connected with alcohol, gambling, pornography, armaments, and pork. Importantly, Shariah law also precludes the charging of interest, which is deemed to be profit made without effort and with no beneficial effects on the community at large. This puts a large swathe of conventional investment off limits to Islamic investors, although a number of specially constructed investment products continue to be approved which circumvent the need to charge interest, and which are proving ever popular.

2006 was the year in which Islamic finance, a concept virtually unheard of outside banking circles a decade ago, finally crossed the border-line between slightly exotic alternative territory and the mainstream. Islamic banking and finance industry has undergone something of an explosion in recent years as demand for an alternative to western banking products structured along ethically-aware Islamic principles has grown, and in early 2007 it received the financial equivalent of the accolade when then UK Chancellor Gordon Brown announced that the Islamic finance industry would be given the same tax treatment in the UK as other investments. The move was applauded by tax and finance experts, who say it puts the City of London at the forefront of the nascent but rapidly growing global industry.

Islamic equity funds are widely available in the traditional Muslim territories of the Middle East and the Far East where many major banks and investment firms offer the products to retail investors. Islamic finance is also gaining a foothold in the west, with many specialist institutions appearing in countries such as the UK and the United States dedicated solely to selling Islamic investment products. Moreover, some major western banks, including the likes of HSBC and Deutsche Bank, are getting in on the act, with more sure to follow.

Key locations for the rapidly developing Islamic finance sector are Dubai and Labuan, because they are sophisticated low-tax centres in Islamic regions with concentrations of wealthy investors, while London and the Cayman Islands, as existing banking and investment fund centres, are home to the highly skilled legal and financial professional communities needed to bring Islamic products to market.

The global Islamic finance industry is now worth more than $1 trillion in terms of assets, having quadrupled in the last three years. Although this figure remains just a fraction of global assets, given a world Muslim population of around 1.5 billion people, the industry has enormous potential, and this is a fact that is starting to be recognised in boardrooms of some of the world’s largest western-based banking, fund management and insurance groups, many of which have now launched banking facilities compliant with Shariah law.

In some respects, the Islamic banking and finance industries are still in their infancy. However, the sector has grown sharply in the last decade or so, and with the global Muslim population currently around 2 billion, growth potential is clearly in place, so expect to see Islamic investment become an established feature of the investment landscape in years to come.

Offshore Equity Investment

Investment in equities listed on offshore stock exchanges is another avenue worth considering in the alternative sphere, which can bring significant tax and cost benefits if the right investment path is taken. Just what is the right investment path however, can vary enormously depending on the jurisdiction of residence (including whether offshore or onshore), the offshore jurisdiction in which the investment is taking place, and the tax, regulatory and legal considerations in both locations. This subject alone could easily stretch to several pages! Therefore, offshore equity investing is an area that needs to be thoroughly researched, and it is essential that a potential offshore investor employs the services of a suitably knowledgeable and impartial financial advisor who specialises in this area. 'Offshore' jurisdictions which have stock exchanges include: Bahamas, Bermuda, Costa Rica, Cyprus, Dubai, Guernsey, Hong Kong, Luxembourg, Mauritius, Panama and Switzerland.

By and large, these offshore markets are suitable only for experienced investors, and with obvious exceptions such as Hong Kong and Switzerland have attracted mostly professional investors. Most of them have done little to encourage international retail investment.

The perils of investing in smaller, offshore markets are well illustrated by Cyprus and Dubai, both of which have seen boom and bust scenarios based on localized 'irrational exuberance'. However, if you are cautious, and do the due diligence, there are sometimes outstanding opportunities in smaller market places. Anyone who was brave and clever enough to go back into the Russian market after 1998 will have been able to retire by now! At least if she didn't buy Yukos.

16.05.2009