Posted by: Financial Sith Lord | November 28, 2009

High-Return Investments and how it works

Nowadays, there’s a foray of bogus or fraudulent websites, claiming to be in direct communications with certain high-return traders or dealers with a so called top 25 European Bank. All claiming to be able to generate 15% – 25% in monthly returns. Some requires you to physically place the cash in an ‘untouched’ account with a specified bank, and some just requires you to block the funds with the bank (on the pretext that the funds don’t actually move).. Let me tell you some thing, all those are just a bunch of baloneys… Since the time of Adam and Eve, investments requires physical capital (in the case of Adam and Eve was semen to create Kane and Abel!!). If you want to grow a tree, don’t tell me all you need to do is promise the pot hole that the seeds are safely placed somewhere else?? All these jargons (blocked funds etc) are just a way for them to run away with your cash. When you sign a form with the bank, blocking your funds for a particular reason, you can’t touch the money. In banking terms its called lien. The lien beneficiary (the hyip promoter) can basically do whatever he likes..

How High-Return Investments (or more commonly referred to as High-Yield Programs) can generate such phenomenal returns are plain simple. You achieve it through leverage, and you can only achieve or secure a high-leverage facility(s) from banks that you’ve had years and years of banking relationship. Banks would not give you a 1:4 overdraft facility if you opened your account yesterday..

High Return Investments (or HYIP) are in general a normal investments traded on carefully structured leveraged facilities. For example, assuming that under normal circumstances, an Equity Trader could generate about 5% gross returns per month on his portfolio value and if his portfolio value was US 1 million, he would be making a gross profit of US 50,000 per month. But if the trader enhances his portfolio structure by leverage, it would be something totally different. Lets assume that trader went to his bank of more than a decade, and asked them for a leveraged credit facility against the US 1 million in his portfolio. Assuming the bank, after considering the trader’s glorious financial and banking track records, decides to give a leverage of 1:5. Meaning, for a facility of US 5 million, the trader is required to place a collateral of US 1 million in value. So, after signing all the relevant banking documents, the trader is granted the US 5 million loan.

The trader then speaks to the broking firm’s Credit Control department, asking them for a leverage facility for his trades. After considering the trader’s glorious track record, the Credit Control gives him a facility of 1:5, where for every US 1 million capital that he puts in into the broking firm’s custodian account, the broking firm would grant him a US 5 million trading limit. Thus the trader now has a new trading limit of US 25 million.

Now, lets incorporate the trader’s true trading skill, of generating 5% per month of his portfolio value. His new portfolio value is now US 25 million, thus he is generating a gross monthly profit of US 1.25 million!!.. Now compare that ROI with the trader’s original portfolio value of US 1 million??.. The trader is making a staggering 125% per month!!.. See!!…

Obviously, in order for the trader to achieve this structured leverage trades, he would have to possess strong fundamental and technical reasons to invest into such trade (arbitrage opportunities), as well as he would need solid relationships with the banks and his broking firm. Off course, there are other methods, slightly more complicated, which could give you an astonishing leverage. These methodology are being used by most of the banks in the world.

To find out how the banks do it, I will elaborate it in my next posting.. So keep track of us okay..

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