Saturday, April 22, 2006

Single Stock Futures - Great Introduction

This is even better that regulated short selling as it has less variables and outlay, for about the same effect. The difference is the time limit, which still can be overcome by rolling the futures contract. Naturally, the leverage is the big thing. To me, single stock futures are akin to warrants, only less cumbersome. At least we don't have to worry about gearing, beta, time to expiry, in/out of money and volume issues. Mind you, these single stock futures will also have similar variables but they are not as decisive or delicate as for warrants.

It is likely that there will not be any expiry but settlement end of each day. The outlay is likely to be about 20% of normal exposure or a gearing/leverage ratio of 5x. An investor would only have to worry about topping up the required margin as these contracts will be marked to market at the end of each day. Single stock futures could very well decimate the potential for short selling. The KLSE is not deep enough a market to support two quite similar intruments. Bursa Malaysia is introducing SSFs on April 28, with 10 stocks as a start. The 10 form part of a list of 42 stocks shortlisted for SSFs.

Kicking off this first tranche are Bursa Malaysia, AirAsia Bhd, AMMB Holdings Bhd, Berjaya Sports Toto Bhd, Genting Bhd, IOI Corporation Bhd, Maxis Communications Bhd, RHB Capital Bhd, Scomi Group Bhd and Telekom Malaysia Bhd. The stocks were selected based on the structured warrants guidelines. Bursa has also obtained the commitment from 50 quasi market makers to play the role of market makers for the SSFs, and expects that number to swell to 100.

While the SSFs is a good thing, it does nothing for market fundamentals. What it does is to give investors things to do if they are bearish on the market/certain stocks. If they are savvy enough, they could do a market neutral hedge fund of their own - this means picking stocks correctly regardless of whether the market goes up or down. If I was creating a market neutral hedge fund, I would go long on Bursa Malaysia and Genting. At the same time, I would go short on Air Asia and RHB Capital. So technically, no matter in a very bullish market or a deep correction, the fund would still come out evens. The returns from the fund would come from picking the stocks that will move up more compared to the ones we shorted. (While I like Air Asia as a company, their share price is prohibitive, no room for mistakes).

Investors will have to appreciate beta or volatility, the volatility between Petronas Gas and Genting is quite wide a berth. The more volatile a stock is, the better it is as a stock future. That is one area which Bursa has missed out. Pick large caps but also stocks with high beta as a preference. A Petronas Gas stock future would yield very low turnover and interest.

1 comment:

zentrader said...

Very timely report. Hope to see your write more articles related to SSF and how to really profit from it (as the hedge fund that you mentioned about). Thank you very much.

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