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What Is Portfolio Transparency and Why Is It Important?
The literal meaning of transparency is the state of being easily detected or seen through, and readily understood. For the capital markets, an evolving theme concerning transparency of financial instruments has been thrust to the forefront.
Transparency in this sense refers to the ability of an investor to look directly into an investment portfolio and see all its components, providing the opportunity to clearly gauge performance and assess risk exposure.
The phenomenal growth in the unregulated global derivatives market, currently estimated at a staggering $347 trillion, has contributed to a broader lack of transparency and an increased appetite for risk. The parlance in Wall Street terms that describes many of the derivative products such as swaps, CDO's, CMO's, and SIV’s has become the hallmark of an industry that produced riskier products offerings, while becoming increasingly more opaque. Often times, real risk in these investments is uncovered only after their weaknesses have been exposed. The ongoing unraveling of these complicated leveraged investments, partially rescued by a Fed sponsored bail-out is a prime example. The majority of investors that bought these riskier traunches of debt were unaware of the potential hazards. In fact, even money market funds which represent some of the safest securities next to Treasury Bills, have invested in structured debt and mortgage obligations only to be exposed to the riskiest sector on the yield curve.
Many of the structured financial products that were packaged as AAA rated products are now rated as junk. It is estimated that ratings firms have downgraded more that $50 billion worth of mortgage related securities in the past few months.
In the commodity arena, the emerging bull market has also spawned growth in demand for commodity linked investment products, many of which are commodity in name only. Some offer exposure tied to a benchmark such as the Dow Jones AIG Commodity Index or the Goldman Sachs Commodity Index. Consequently, investing in the indices may also involve using swaps, structured notes, securities, fixed income or a combination of them all.
As investment vehicles, strategies and valuation methodologies have become increasingly more obscure, investors are seeking ways to gain desired exposure in a straight-forward, transparent manner. Exchange listed futures contracts offer investors exposure to the commodities asset class with the appropriate transparency. Investors in commodities and managed futures can utilize products that provide the market exposure that is aligned with their investment goals and objectives.
For example, there are several investment vehicles that track a popular commodity index, the Rogers International Commodity Index (RICI). Among them are limited partnerships, structured notes, and exchange listed futures contracts called TRAKRS. All provide exposure to the RICI, but only TRAKRS provide the largest measure of liquidity and transparency. Limited partnerships can be illiquid and may also involve third-party credit risk. The same may also be said for structured notes. Only exchange traded TRAKRS offer full transparency, daily liquidity, the benefit for real time price discovery and absolutely NO third-party credit risk because the Chicago Mercantile Exchange acts as the counter party for all transactions.
If you are in search of a transparent pathway to the commodity markets, regulated futures contracts offer a secure mechanism for accomplishing your objectives.
Learn more about the financial safeguards created by the CFTC, NFA and all U.S. futures exchanges.
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