DOCSLIB.ORG

Applying Fundamental Analysis to Distressed Investing

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Applying Fundamental Analysis to Distressed Investing Applying Fundamental Analysis to Distressed Investing Introduction As part of a strategy to diversify their portfolio, investors should consider an allocation to distressed funds. Historically, this asset class has performed extremely well through cycles, generating above average returns while providing a relatively low correlation to the broader markets1. However, distressed investments often experience periods of reduced liquidity, which investors must be willing to accept and which require fund managers to actively manage asset and liability duration in their portfolios. Additionally, distressed investing tends to be highly complex and requires financial and legal knowhow and experience in order to capitalize on the opportunity. Consequently, allocations to distressed situations should be entrusted to individuals and firms that specialize in this type of investing and have demonstrated an ability to invest in the asset class through a broader credit cycle. This paper will provide an overview of the investment process in distressed corporate securities and bank debt2 and the opportunity to generate alpha through an allocation to this asset class. This paper is divided into three parts: Part 1 will provide an overview of distressed investing and review various strategies for investing in this asset class. Part 2 will begin a discussion of the distressed investing process and address both the sourcing of distressed opportunities as well as the financial and legal analysis necessary to make investments in distressed situations. Part 3 will continue the review of the process of distressed investing and examine some of the characteristics inherent in investing in this asset class. Overview of Distressed Investing Distressed investing involves investments in businesses that are experiencing financial distress and are either (i) undergoing a restructuring, reorganization or bankruptcy or (ii) the market perceives a higher probability that they will need to do so in the future. The distress is typically caused by a deterioration of cash flow relative to expectations or an increase in liabilities and the associated concerns regarding liquidity or solvency of the business. A wide variety of factors may lead to the distressed situations including a failure of the management team to execute their business plan, loss of contracts, 1 See “An Overview of Event-Driven Investing: Potential for Alpha and Lower Correlation”, Fidelity Investments, December 2013. Also, of the 12 strategies that make up the Credit Suisse Hedge Fund Indexes, the Distressed strategy had the second highest average annual returns and the highest Sharpe ratio during the period from January 1994 through September 2015. 2 While there are other types of distressed assets, including distressed real estate, structured products, portfolios, sovereigns or municipalities, this paper will deal primarily with investments in single name corporate distressed situations. Applying Fundamental Analysis to Distressed Investing Part 1 of 3 Page 1 Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/23/2021 competitive pressures, cyclical or secular changes to an industry, litigation, the discovery of new liabilities or the increase in pre-existing liabilities (for example, environmental or pension liabilities). Additionally, the risk of distress is exacerbated in situations when the company is heavily leveraged. As a result, the distressed cycle tends to follow periods of easy access to capital, after corporations have taken advantage of looser lending standards to fund buyouts, capital expenditures, acquisitions or dividends. Inevitably, the market realizes that many of these companies were inappropriately capitalized and cannot support their balance sheet. As Warren Buffet said, “only when the tide goes out do you discover who’s been swimming naked.” Irrespective of the reasons for the financial distress, once it occurs (or once the market recognizes the increased risk of it occurring), the company’s fixed income securities, bank debt and other claims will trade down to a level that the market perceives to be the present value of their recovery in a restructuring or reorganization process or to a level that provides a yield commensurate with the increased risk.3 However, there are times when Mr. Market gets it wrong, when fear outweighs greed and the various assets trade at deep discounts to recovery value or provide outsized yields relative to the risk. A distressed investor’s ultimate goal is to identify those situations when Mr. Market errs and to capitalize on what they believe to be an asymmetric risk / reward situation by investing with a margin of safety. Although all asset classes trade below intrinsic value from time to time (and value investors’ goals are always to identify those opportunities), the securities and loans of distressed companies tend to have a higher propensity to be mispriced relative to fundamental value than other investment assets. There are a number of reasons for this: Distressed situations occur because of some aberration relative to expectations: financial forecasts were not realized, liabilities are greater than previously assumed, or industries are experiencing cycles or secular changes. When things go wrong (and there is a lack of understanding as to what occurred and how it will be resolved), fear and panic can guide investment decisions and result in selling. Some investors are precluded by their investment mandate from owning assets that fall below a certain credit rating or other investment criteria forcing them to sell. Recent regulations, including Dodd-Frank and Basel III have put pressure on banks to sell distressed assets as a means of improving their capital adequacy ratios. Investors with highly diversified portfolios may lack the internal resources necessary to analyze the distressed situations and assess the recovery and prefer to “just get out.” Many investors lack either the infrastructure or expertise necessary to engage in restructurings. 3 Debt is typically considered distressed when it trades at an option adjusted spread of at least 1,000 basis points above the risk-free rate. Applying Fundamental Analysis to Distressed Investing Part 1 of 3 Page 2 Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/23/2021 The timeframe to work through a restructuring and the liquidity profile of the assets during the restructuring may cause an asset / liability duration mismatch in the investors’ portfolio forcing them to sell. Some investors may be prohibited from owning post-reorganization securities or lack the ability to provide fresh capital to the company. The result is that there is a strong bias for investors to sell as the market perceives the financial distress and this may result in assets trading below their intrinsic value. Consequently, distressed investors, by nature, must be contrarian and willing to step into situations when the herd is running in the other direction. While investments in distressed situations are typically expressed through secondary trades of the companies’ debt or trade claims at significant discounts to par, distressed investment professionals generally preserve wide latitude to opportunistically invest across the capital structure or to make direct investments into the business. Often in distressed situations, the equity will trade as an inexpensive option on the survival of the business. If the investor deems that the market is wrong about the risk of a restructuring or the recoveries, he or she may be able to buy the equity at values that provide a very asymmetric risk / reward. Additionally, investors may have the opportunity to directly invest in the business. Such investments may include Capital to fund an operational restructuring Capital for the company to bid for its own securities at a discount or to provide a cash element in an exchange offering A debtor in possession loan (DIP) in a bankruptcy Working or growth capital subsequent to a restructuring or reorganization. The injection of capital prior to or during a restructuring or reorganization is typically invested at a super senior level with priority over preexisting debt. In order to exploit the opportunities to provide additional capital, distressed investors will often maintain some dry powder. Distressed Investing Strategies There are two basic strategies for distressed investing: a trading strategy and an active management strategy. As the name implies, a trading strategy involves investing in situations where the investor generates alpha through appreciation of the securities and loans purchased, and then sells those assets in the market. These distressed investors may invest in situations where they believe the market has overestimated the risk of a restructuring and once that risk is mitigated the assets will trade up to intrinsic value. Alternatively, if during a restructuring process the market receives greater clarity on the recovery and timing, assets may appreciate allowing investors the ability to realize profits. The key to a trading strategy is that managers generally are not directly involved in the restructuring process and tend to invest in situations that they believe will remain liquid. Applying Fundamental Analysis to Distressed Investing Part 1 of 3 Page 3 Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/23/2021 An active management strategy, on the other hand, involves investments in situations where the manager believes he or she can create value through managing
Load more

Recommended publications
  • Initial Public Offerings
    November 2017 Initial Public Offerings An Issuer’s Guide (US Edition) Contents INTRODUCTION 1 What Are the Potential Benefits of Conducting an IPO? 1 What Are the Potential Costs and Other Potential Downsides of Conducting an IPO? 1 Is Your Company Ready for an IPO? 2 GETTING READY 3 Are Changes Needed in the Company’s Capital Structure or Relationships with Its Key Stockholders or Other Related Parties? 3 What Is the Right Corporate Governance Structure for the Company Post-IPO? 5 Are the Company’s Existing Financial Statements Suitable? 6 Are the Company’s Pre-IPO Equity Awards Problematic? 6 How Should Investor Relations Be Handled? 7 Which Securities Exchange to List On? 8 OFFER STRUCTURE 9 Offer Size 9 Primary vs. Secondary Shares 9 Allocation—Institutional vs. Retail 9 KEY DOCUMENTS 11 Registration Statement 11 Form 8-A – Exchange Act Registration Statement 19 Underwriting Agreement 20 Lock-Up Agreements 21 Legal Opinions and Negative Assurance Letters 22 Comfort Letters 22 Engagement Letter with the Underwriters 23 KEY PARTIES 24 Issuer 24 Selling Stockholders 24 Management of the Issuer 24 Auditors 24 Underwriters 24 Legal Advisers 25 Other Parties 25 i Initial Public Offerings THE IPO PROCESS 26 Organizational or “Kick-Off” Meeting 26 The Due Diligence Review 26 Drafting Responsibility and Drafting Sessions 27 Filing with the SEC, FINRA, a Securities Exchange and the State Securities Commissions 27 SEC Review 29 Book-Building and Roadshow 30 Price Determination 30 Allocation and Settlement or Closing 31 Publicity Considerations
    [Show full text]
  • Stock in a Closely Held Corporation:Is It a Security for Uniform Commercial Code Purposes?
    Vanderbilt Law Review Volume 42 Issue 2 Issue 2 - March 1989 Article 6 3-1989 Stock in a Closely Held Corporation:Is It a Security for Uniform Commercial Code Purposes? Tracy A. Powell Follow this and additional works at: https://scholarship.law.vanderbilt.edu/vlr Part of the Securities Law Commons Recommended Citation Tracy A. Powell, Stock in a Closely Held Corporation:Is It a Security for Uniform Commercial Code Purposes?, 42 Vanderbilt Law Review 579 (1989) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol42/iss2/6 This Note is brought to you for free and open access by Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law Review by an authorized editor of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. Stock in a Closely Held Corporation: Is It a Security for Uniform Commercial Code Purposes? I. INTRODUCTION ........................................ 579 II. JUDICIAL DECISIONS ................................... 582 A. The Blasingame Decision ......................... 582 B. Article 8 Generally .............................. 584 C. Cases Deciding Close Stock is Not a Security ...... 586 D. Cases Deciding Close Stock is a Security .......... 590 E. Problem Areas Created by a Decision that Close Stock is Not a Security .......................... 595 III. STATUTORY ANALYSIS .................................. 598 A. Statutory History ................................ 598 B. Official Comments to the U.C.C. .................. 599 1. In G eneral .................................. 599 2. Official Comments to Article 8 ................ 601 3. Interpreting the U.C.C. as a Whole ........... 603 IV. CONCLUSION .......................................... 605 I. INTRODUCTION The term security has many applications. No application, however, is more important than when an interest owned or traded is determined to be within the legal definition of security.
    [Show full text]
  • The Importance of the Capital Structure in Credit Investments: Why Being at the Top (In Loans) Is a Better Risk Position
    Understanding the importance of the capital structure in credit investments: Why being at the top (in loans) is a better risk position Before making any investment decision, whether it’s in equity, fixed income or property it’s important to consider whether you are adequately compensated for the risks you are taking. Understanding where your investment sits in the capital structure will help you recognise the potential downside that could result in permanent loss of capital. Within a typical business there are various financing securities used to fund existing operations and growth. Most companies will use a combination of both debt and equity. The debt may come in different forms including senior secured loans and unsecured bonds, while equity typically comes as preference or ordinary shares. The exact combination of these instruments forms the company’s “capital structure”, and is usually designed to suit the underlying cash flows and assets of the business as well as investor and management risk appetites. The most fundamental aspect for debt investors in any capital structure is seniority and security in the capital structure which is reflected in the level of leverage and impacts the amount an investor should recover if a company fails to meet its financial obligations. Seniority refers to where an instrument ranks in priority of payment. Creditors (debt holders) normally have a legal right to be paid both interest and principal in priority to shareholders. Amongst creditors, “senior” creditors will be paid in priority to “junior” creditors. Security refers to a creditor’s right to take a “mortgage” or “lien” over property and other assets of a company in a default scenario.
    [Show full text]
  • In Re Security Finance Co
    University of California, Hastings College of the Law UC Hastings Scholarship Repository Opinions The onorH able Roger J. Traynor Collection 11-12-1957 In re Security Finance Co. Roger J. Traynor Follow this and additional works at: http://repository.uchastings.edu/traynor_opinions Recommended Citation Roger J. Traynor, In re Security Finance Co. 49 Cal.2d 370 (1957). Available at: http://repository.uchastings.edu/traynor_opinions/526 This Opinion is brought to you for free and open access by the The onorH able Roger J. Traynor Collection at UC Hastings Scholarship Repository. It has been accepted for inclusion in Opinions by an authorized administrator of UC Hastings Scholarship Repository. For more information, please contact [email protected]. 370 IN BE SECURITY FINANCE CO. [49 C.2d [So F. No. 19455. In Bank. Nov. 12, 1957.] In re SECURITY FINANCE COMPANY (a Corporation), in Process of Voluntary Winding Up. EARL R. ROUDA, Respondent, V. GEORGE N. CROCKER et at, Appellants. [1] Corporations-DissolutioD.-At common law a corporation had no power to end its existence; the shareholder.- could surrender the charter, but actual dissolution depended on acceptance by the sovereign. [2] ld.-Voluntary Dissolution-Judicial SupervisioD.-The su­ perior court has jurisdiction to supervise the dissolution of a corporation by virtue of Corp. Code, § 4607, only if the cor­ poration is "in the process of voluntary winding up," and the corporation is in the process of voluntary winding up only if a valid election to wind up has been made pursuant to § 4600. [3] 1d.-Volunta17 Dissolution-Rights of Shareholders.-Share­ holders representing 50 per cent of the voting power do not have an absolute right under Corp.
    [Show full text]
  • Frequently Asked Questions About Initial Public Offerings
    FREQUENTLY ASKED QUESTIONS ABOUT INITIAL PUBLIC OFFERINGS Initial public offerings (“IPOs”) are complex, time-consuming and implicate many different areas of the law and market practices. The following FAQs address important issues but are not likely to answer all of your questions. • Public companies have greater visibility. The media understanding IPOS has greater economic incentive to cover a public company than a private company because of the number of investors seeking information about their What is an IPO? investment. An “IPO” is the initial public offering by a company • Going public allows a company’s employees to of its securities, most often its common stock. In the share in its growth and success through stock united States, these offerings are generally registered options and other equity-based compensation under the Securities Act of 1933, as amended (the structures that benefit from a more liquid stock with “Securities Act”), and the shares are often but not an independently determined fair market value. A always listed on a national securities exchange such public company may also use its equity to attract as the new York Stock exchange (the “nYSe”), the and retain management and key personnel. nYSe American LLC or one of the nasdaq markets (“nasdaq” and, collectively, the “exchanges”). The What are disadvantages of going public? process of “going public” is complex and expensive. • The IPO process is expensive. The legal, accounting upon the completion of an IPO, a company becomes and printing costs are significant and these costs a “public company,” subject to all of the regulations will have to be paid regardless of whether an IPO is applicable to public companies, including those of successful.
    [Show full text]
  • List of All Fees for the Securitytrustsm Reloadable Visa® Prepaid Card Issued by Republic Bank of Chicago, Member FDIC, Pursuant to a License from Visa U.S.A
    CARDHOLDER AGREEMENT List of all fees for the SecurityTRUSTSM Reloadable Visa® Prepaid Card issued by Republic Bank of Chicago, Member FDIC, pursuant to a license from Visa U.S.A. Inc. All Fees Amount Details Monthly usage Monthly Fee is $7.95. The Monthly Fee is waived for the first 60 days Monthly fee $7.95 after the initial load. The Monthly Fee is also waived if you receive direct deposits of $500.00 or more every 35 days. Add money Fee of up to $5.95 may apply when reloading your Card at Retail Locations, including Green Dot® and Visa ReadyLink reload agents. This Cash reload $5.95 fee is charged by the reload agent and is subject to change. Reload locations may be found at www.insightvisa.com. Fee of up to 5% of the amount of a check loaded through third party 5%, $5.00 applications may apply, subject to a $5.00 minimum. Service is subject to Mobile check load minimum third party terms and conditions. This fee is charged by a third party and is subject to change. Spend money Per purchase transactions None No fees are assessed for domestic purchase transactions. Bill pay available when you log in to your account at Bill payment None www.insightvisa.com. There is no charge to complete a bill pay transaction. There is no charge to originate or receive transfers between your Card Card to card transfer None and another Insight-branded or SecurityTRUSTSM-branded Card. Get cash You will not be charged a fee for cash withdrawals at “in-network” ATMs.
    [Show full text]
  • •Central Securities Depository •Creating Stock •Corporate Actions •Clearance and Settlement •Fixed Income Issues •M
    ® LIFE CYCLE OF A SECURITY explores the role of central securities depositories in the United States and global capital markets, with a particular focus on the part The Depository Trust Company (DTC) plays in launching new securities issues and providing the essential services that security issuers require. The guide explains the process of creating and dis tributing stocks and bonds in the primary and secondary markets,- the details of clearing and settling retail and institutional transac tions, and the sophisticated infrastructure that enables the seamless- payment of dividends and interest, smooth management of tender offers and other corporate actions, and essential risk protection in an increasingly global environment. LIFE CYCLE OF A SECU RITY LIFE CYCLE OF A SECU RITY If trading volume between countries WHAT’S AN justifies it, CSDs are frequently linked INTERNATIONAL CSD? Central Securities Depositories electronically, and have accounts with There are currently two International The certificate stops here. each other, so that securities can be Central Securities Depositories (ICSDs), both moved electronically between them. In located in Europe: Clearstream Banking in most cases, payment for those securities Luxembourg and Euroclear Bank in Belgium. In the quest to attract capital and make shares that an issuing corporation offers is usually handled between the trading Initially created to accommodate the their economies more vibrant, most for sale in one or more countries in addi- firms’ settlement banks rather than expanding market in Eurobonds—bonds countries with active capital markets tion to its home market. This approach through the CSD, though some CSDs issued in a different currency and sold in have central securities depositories allows the corporation, working with a are equipped to handle both transfer a different country than that of the issuer, (CSDs) to provide the custody and local depositary bank, to raise capital in and payment.
    [Show full text]
  • Glossary of Bond Terms
    Glossary of Bond Terms Accreted value- The current value of your zero-coupon municipal bond, taking into account interest that has been accumulating and automatically reinvested in the bond. Accrual bond- Often the last tranche in a CMO, the accrual bond or Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest. Accrued interest- (1) The dollar amount of interest accrued on an issue, based on the stated interest rate on that issue, from its date to the date of delivery to the original purchaser. This is usually paid by the original purchaser to the issuer as part of the purchase price of the issue; (2) Interest deemed to be earned on a security but not yet paid to the investor. Active tranche- A CMO tranche that is currently paying principal payments to investors. Adjustable-rate mortgage (ARM)- A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM's interest rate is tied to an objective, published interest rate index. Amortization- Liquidation of a debt through installment payments. Arbitrage- In the municipal market, the difference in interest earned on funds borrowed at a lower tax-exempt rate and interest on funds that are invested at a higher-yielding taxable rate.
    [Show full text]
  • Can Underwriters Profit from IPO Underpricing?
    Footloose with Green Shoes: Can Underwriters Profit from IPO Underpricing? Patrick M. Corrigan† Why are green shoe options used in initial public offerings (IPOs)? And why do underwriters usually short sell an issuer’s stock in connection with its IPO? Are underwriters permitted to profit from these trading po- sitions? Scholars have long argued that underwriters use green shoe options together with short sales to facilitate price stabilizing activities, and that U.S. securities laws prohibit underwriters from using green shoe options to profit from IPO underpricing. This Article finds the conventional wisdom lacking. I find that underwriters may permissibly profit from IPO under- pricing by pairing purchases under a green shoe option with offshore short sales. I also find that underwriters may permissibly profit from IPO over- pricing by short selling the issuer’s stock in the initial distribution. The possession of a green shoe option and the ability to short sell IPOs effectively makes underwriters long a straddle at the IPO price. This posi- tion creates troubling incentivizes for underwriters to underprice or over- price IPOs, but not to price them accurately. This new principal trading theory for green shoe options and under- writer short sales provides novel explanations for systematic IPO mispric- ing, the explosive initial return variability during the internet bubble, and the observation of “laddering” in severely underpriced IPOs. This Article concludes by charting a new path for the regulatory scheme that applies to principal trading by underwriters in connection with securities offerings. Consistent with the purpose of preserving the integrity of securities markets, regulators should address the incentives of under- writers directly by prohibiting underwriters of an offering from enriching themselves through trading in the issuer’s securities.
    [Show full text]
  • Guarantees and Surety Bonds
    Guarantees and Surety Bonds Every guarantee/surety bond Guarantees and Surety Bonds must be carefully examined to By issuing a guarantee/surety bond, the bank acts as the guarantor for an obligation determine its legal significance owed by the debtor. What these two instruments have in common is the bank’s prom- and viability. ise to stand in for the payment of a debt or performance of a service should the debtor fail to fulfill his or her contractual obligations. With this promise, the bank undertakes to pay a maximum specified amount when the conditions of the guarantee/surety bond Table of Contents are met. Guarantees and Surety Bonds 1 As well as issuing guarantees and surety bonds, Credit Suisse also offers advice for Difference between a Guarantee and guarantees from third-party banks. As part of this service, Credit Suisse assesses the a Surety Bond 2 authenticity of the guarantee and advises the beneficiary (recipient of the guarantee) of any points that are unclear. Types of Guarantees 2 Types of Surety Bonds 3 A guarantee or surety bond may only be issued if the client has been granted a line of credit. The bank may require adequate collateral. Commissions and Charges 4 Some countries still require their own country or bank-specific guarantee wording. The contacts in our guarantee department would be happy to answer any specific queries you may have concerning individual countries. Direct Guarantee The bank issues the guarantee directly to the beneficiary. The guarantee is sent to the beneficiary directly by the bank, via its principal or via a third-party bank, which passes it to the beneficiary without assuming any liability of its own.
    [Show full text]
  • Takeover Threats, Job Security Concerns, and Earnings Management
    TAKEOVER THREATS, JOB SECURITY CONCERNS, AND EARNINGS MANAGEMENT Edward S. Sul A dissertation submitted to the faculty at the University of North Carolina at Chapel Hill in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Kenan-Flagler School of Business. Chapel Hill 2017 Approved By: Robert M. Bushman Mark H. Lang Bradley E. Hendricks Eva Labro Wayne R. Landsman Christian T. Lundblad © 2017 Edward S. Sul ALL RIGHTS RESERVED ii ABSTRACT Edward S. Sul: Takeover Threats, Job Security Concerns, and Earnings Management (Under the direction of Robert M. Bushman and Mark H. Lang) I exploit the international, staggered adoption of takeover laws in order to examine the effect of increased turnover sensitivity to performance on managers’ financial reporting choices. Using a difference-in-difference design, I find that the enactment of laws designed to promote takeover activity is associated with greater earnings management (abnormally high accruals, small positive earnings, discretionary earnings smoothing and poor accruals quality) and greater opacity (reduced analyst forecast accuracy and following and greater forecast dispersion). This is consistent with managers responding to increased risk of termination by distorting earnings information. As predicted, results are particularly pronounced for managers with the highest ex ante risk of termination and at firms with poor performance. The effects are mitigated in countries in which strong institutions limit the CEOs’ ability to manage earnings and create opacity. Overall, my results suggest that reforms aimed at enhancing governance through higher turnover sensitivity to performance encourage earnings management and opacity by increasing job security concerns. iii To Mom, Dad, and my loving wife, Dasol iv ACKNOWLEDGEMENTS I am grateful to my dissertation committee for their guidance and support: Robert Bushman (co-chair), Mark Lang (co-chair), Bradley Hendricks, Eva Labro, Wayne Landsman, and Christian Lundblad.
    [Show full text]
  • I:\Security Futures Investor Gu
    Table of Contents 4 Introduction 6 Part One: Futures Markets, Futures Contracts and Futures Trading 15 Part Two: Security Futures Illustrations - Opportunities, Risks and Limitations 20 Part Three: Are Security Futures For You? A Brief Guide to Due Diligence 24 NFA Information and Resources 25 Additional Resources Security Futures: An Introduction to Their Uses and Risks Financial markets today offer an ever- widening array of financial products. Among the most recent are security futures, which include futures contracts on com- mon stocks and futures contracts on a narrow-based index of securities. Security futures, which have been autho- rized by Congress, can be bought and sold for either price risk management or for speculative purposes. For many reasons, security futures may or may not be an appropriate trading vehicle for any given individual. Or they may be appropriate in some circumstances but not others. National Futures Association, a Congression- ally authorized self-regulatory organization, has prepared this booklet to provide an introduction to what security futures are, how they work, and how they can be used, as well as their risks and limitations. This booklet is not intended to serve as a formal risk disclosure statement. That document must be provided by the broker offering the product. This booklet is merely intended to be one component of the due diligence individuals are encouraged to undertake prior to making any invest- ment decision regarding security futures. For additional information, refer to NFA’s brochure, “Understanding the Opportunities and Risks in Futures Trading” and the secu- rity futures risk disclosure statement. Both documents can be found on NFA’s web site (www.nfa.futures.org).
    [Show full text]