I am sure most regular Readers and Twitter Followers are aware that I am a bit nervous on the Markets after a good run up and with Spring approaching and a very uncertain General Election in May, I think we could see a proper Pullback. Following on from this, David Greer (@DavGreer on Twitter) helpfully suggested that one of the Societe Generale ‘Infinite Turbo’ Products might be worth trying in order to Hedge (go Short) in a Normal Share account. Unfortunately, they cannot be used in ISAs (shame) but are allowed in a SIPP or in a Normal Share Account that does not sit in a Tax Wrapper. David Stevenson in Investors Chronicle has recently been buying some of these Products within his SIPP.
If you do not have a Spreadbet Account, this could be a great way of being able to Short with Gearing and the safety of a Guaranteed Stoploss.
With me not too keen on buying stuff, I have a bit of time so I thought it would be a good idea to dig deep into these Infinite Turbo efforts and figure out what they can do for me, how exactly they work, and what are the risks involved. They are very complex so this has been quite a task !!
I will really focus on the FTSE100 Short Products that are available, but the discussion around these will stray into the wider Infinite Turbos arena - in essence they are Leveraged Products with Guaranteed Stoplosses built in that can be traded like Normal Shares but you can go Long or Short, and they are available on a variety of Assets including Indexes and individual Stocks. I think SocGen class them as ‘Warrants’ but that is irrelevant really.
The full list of Infinite Turbos available is listed here:
It’s a bit of a pain but you actually have to scroll slowly through the Disclaimer thing and read all the fine print. They are only ‘allowed’ for ‘Sophisticated Retail Investors’ (and Institutions obviously) which means you need to have some experience of the Stockmarket really - you will need to fill out a Form with your Broker to show your level of experience I think.
You can download an excellent PDF on Infinite Turbos here:
Click on the bit that says ‘Infinite Turbos brochure’.
They have many similarities to Spreadbets and other Leveraged products - it might be worth reading my entire Blog Series on these at:
What is an Infinite Turbo?
They are very much like an ETF (Exchange Traded Fund) where you can but them like Normal Shares and hold them for pretty much as long as you like, as they do not have an Expiry Date. However, they incorporate a level of Gearing that you can pretty much choose and they have 100% Guaranteed Stoplosses built in. You can use them to take Positions on all sorts of Underlying Assets like Stocks, Indexes, Commodities, FOREX Pairs, etc. and you can go Long or Short. They appear to be very complicated Products but in reality I don’t think they amount to much more than I have put in this paragraph.
The Leverage is the beauty of these products - for instance, if the ‘Instrument’ you choose has Gearing of 12 times, this means that for £1000 of Risk you can get £12,000 worth of Exposure to the Underlying Asset. So you have much more reward and limited Risk (the £1000 is the most you could possibly lose, and in practice you could well lose less than this as will become sort of clear later on !!)
They have the following ‘Levels’ which are derived from the Underlying Asset in which you are getting Exposure:
- Opening Level - this is the Level of the Underlying Asset when you Buy the Infinite Turbo - the price you pay moves in line with changes in the Underlying Asset price.
- Finance Level - The part of the Infinite Turbo’s price that is financed by SocGen (because this is a Leveraged Product, there is a Finance Charge for the bit you ‘borrow‘ - similar to Spreadbets and CFDs etc.). The Finance Level provides a reference level for the Underlying Asset from which the price of the Infinite Turbo is calculated. The Finance Level will move over time according to the Finance Charge (explained below).
- Knock Out Level (KO) - if this level is ever touched the Infinite Turbo will expire. Think of this as a Stoploss Level, but it is built into the Product when you buy it.
- Redemption Level - this is the difference between the Underlying Asset Price and the Finance Level. Where the KO Level is hit, the Redemption Level will be based on the LOWEST Underlying Asset level for Longs and the HIGHEST Underlying Asset level for Shorts during the 3 hours following the KO event. This is quite complicated, but to be honest, it is not worth worrying too much about. All you really need to think is that you could lose 100% of your Cash Invested at any time on these things, but there is a good chance you will lose a bit less than this.
As mentioned above, these Products incorporate a Financing Charge - however, in a similar way to Spreadbets and CFDs, it is pretty tiny really. The rate currently is roughly 2% per Annum plus a Monthly LIBOR Finance Rate - the Finance Charge is applied daily to the ‘Financed Level’ and it is applied Monthly to the KO Level (please note the rate varies for each different Infinite Turbo - the SocGen website lists each instrument and its associated Finance Fee - they vary from 1.5% to 2.6% on top of the Monthly Libor at the moment.) Due to these pretty reasonable Finance Rates, it is not a big issue to hold for long periods - possibly even months if need be. For Underlying Assets that pay a decent Dividend, the Divvy can offset the Finance Charge. The actual Finance Cost is dependent on the
Underlying Asset chosen and the type of Infinite Turbo - this will be shown in the list of Products available on the SocGen website (see below).
I think the ScreenShot below from the PDF, explains the above Levels and financing stuff quite well:
The ScreenShot below is taken from the PDF and shows how it works when using an Infinite Turbo Short. Note, they mention ‘Parity’ which is explained as follows:
‘In some cases a scaling factor called `Parity’ is used to reduce the cost of investment. A parity of 1,000 for example means that one Infinite Turbo is equivalent to 1,000th of the Underlying Asset. As such, any move in the Underlying Asset is divided by 1,000 in the Infinite Turbo.’
I found this quite a complex idea - I don’t think we need to worry about it too much if we don’t get it. Seems like detail that is pretty irrelevant.
This ScreenShot from the PDF pretty much explains it:
- Counter Party Risk - these Products are created and offered by SocGen - they are actually done by a Subsidiary but the bottom line is that SocGen is the Guarantor - so you are at risk of SocGen’s financial position really. However, you can only ever lose 100% of your Cash Invested. At the time the PDF was produced back in September 2014, SocGen Debt had an A Credit Rating from Standard & Poors and an A2 Credit Rating from Moodys.
- It is possible to get ‘Knocked Out’ on a Price Spike in the Underlying Asset - as with all Stoplosses, this is a potential issue and you need to choose an Instrument with a Stoploss that suits your needs and I would personally go for one with a pretty wide ‘wiggle room’ to avoid such Spike problems. The wider the wiggle room, the lower the Gearing which is perhaps the best approach, especially when first trying these Products.
- They are pretty complex Instruments in theory - so it is best to have a good understanding before you take the plunge. I also would recommend trying in a small size first off to see how well it works in practice. This is the approach I will take when I get round to buying one.
- Because of the Gearing, the Price of the Infinite Turbo can move fast and if it goes against you, then you could quickly get Knocked Out. For this reason, a lower level of Gearing is probably best.
What are the Advantages / Benefits?
- Gearing (Leverage) is a huge Advantage of these products - however, the Amount of Leverage can vary a lot and you need to choose your Product carefully, taking particular note of the Gearing (this seems to vary according to the Instrument chosen and can vary from as low as 5% to as much as 20% or even higher - it partly depends on when you buy the Instrument). This is because the higher the Gearing amount, the tighter your ‘Guaranteed Stoploss’ will be - so intraday spikes could take you out on a High Geared Infinite Turbo - and because of the higher Gearing, it will move faster and this makes the likelihood of you getting Knocked Out even higher. From what I have read, I would suspect that Gearing around 10 times or so is about right. There also appears to be lower Geared products available - these might be best for people who have never used these before. Gearing at 20 or more times will probably kick you out pretty fast. This would have the usual problem with Stoplosses that you get kicked out on a Spike intraday and then the Price reverses and goes in your favour - so you were right all along, but you miss out !! Really annoying.
- Limited Risk - you can only ever lose 100% of your Cash used to buy the Product - this is like buying a Share. Interestingly, even if the Price of the Underlying Asset moves fast and kicks you out, you might not actually lose 100% - but you will lose most of your Cash. It may be that you lose 80% of the Cash Invested. Think of them as being like a Spreadbet or CFD etc. with a Guaranteed Stoploss. If the Price of the Underlying Asset moves quickly past your KO Level and in theory you should lose more than 100% of the Capital you put in, SocGen take on that Risk. You can only lose Maximum 100% of your Capital.
- Unlimited Gain if going Long. Funnily enough, SocGen claim you can have Unlimited Gain going Short also - I suspect this is incorrect - after all, an Underlying Asset cannot drop below Zero.
- You can buy in normal Share Trading Accounts and in a SIPP - unfortunately you cannot buy in an ISA.
- You can find products to enable you to go Long or Short.
- Due to the low finance charges and no ‘Rollover’ tracking issues like you get on some Exchange Traded Funds (ETFs) like SUK2, it is no problem holding these things for long time periods - months even. They are also suitable for shorter timescales like days or weeks. There is no fixed term - you could in theory, hold forever.
- If you are Long using an Infinite Turbo, then you get the Dividend if one is paid for the Underlying Asset. It is credited to you within the daily Finance Level adjustments.
Are there any Limitations / Disadvantages?
- These products are only available to ‘Sophisticated Investors’ - from what the SocGen bumpf says, it seems like prospective buyers need to fill out a ‘Complex Products Assessment Form’ from their Broker. I have not done this yet, although I probably will, and I imagine they will only allow people who have had accounts for some years to trade these things. I suspect this is why they are not allowed in ISAs - another example of the Regulators ‘protecting’ us from a Product which might actually lower our Risk !!
- If you are Short using an Infinite Turbo, then you lose the Dividend. Don’t worry about it, it is all calculated within the daily Finance Level of the product.
- The amount of Gearing varies for each Instrument but, more importantly, if varies according to the Price of the Underlying Asset when you actually buy it. You don’t need to know the complex formula SocGen uses to calculate Gearing as it is always displayed on their website. The key thing is that the Gearing does not change once you have bought an Infinite Turbo as it is locked in by the price you pay in relation to the Finance Level. However, depending on when you buy a product, and what the price of the Underlying Asset is at that time, the Gearing can be very different, and so can potential Risk and Reward.
- If you use an Infinite Turbo which is listed in any Currency other than Pounds Sterling, then you could be exposed to Currency Risk. Probably best avoided in my view, stick to good old Quids Sterling.
- SocGen is the only ‘Market Maker’ for Infinite Turbos so there could occasionally be liquidity issues. See page 14 of the PDF for details on this but I suspect it would only be a problem on extremely rare occasions.
- Infinite Turbos are not covered by the provisions of the Financial Services Compensation Scheme (FSCS).
- I have not looked into the Tax Implications. I suspect that if you hold outside a SIPP (remember, you cannot hold these in an ISA - damn shame), then you will probably be liable for Capital Gains Tax (CGT) on any profits, but it might depend on where the Products are domiciled.
How do I trade an Infinite Turbo?
To an extent they are like a Normal Share that you just Buy when you want it and Sell when you don’t !! Due to the Guaranteed Stoploss nature of the things, you need to have a defined Stoploss Level in mind before you buy the Product - this is because you need to select the right Product for you from the List of Infinite Turbos that are available. For example, you may wish to Short the FTSE100 and you will find there are several Infinite Turbos available that will do this for you - but they all have different Guaranteed Stoploss Levels (KO Levels) and Gearing Levels. They have an EPIC code which you can find on the SocGen website - see below.
As mentioned earlier, you need to have already set up with your Broker that you wish to trade these Products and you will have had to fill out a Form I suspect.
Here is a list of the Stockbrokers that SocGen says will do their products - there are probably some others as well, for example, igIndex and their new Share Dealing service:
It seems like pretty much the ‘usual suspects.’
Where is the Full Range of Infinite Turbos Listed?
Use the link below to find the Full Range:
This ScreenShot gives you an idea of how it looks:
I hope this has given you a good insight into what I think could be a very useful tool for Hedging purposes and some Readers may wish to use the broader spectrum of Infinite Turbos to access other Underlying Assets in a Geared way with the safety of a Guaranteed Stoploss.
I particularly like the idea of the Gearing - this is because I often Topslice a few things prior to a general Market Pullback, but this means I often only have about 5% or 10% Cash available. If I was to Short using XUKS (an ETF that enables you to Short the FTSE100), then I have no gearing so the Hedging effect is pretty limited. By using the Gearing, I can get a lot more Bang for my Buck. As ever, make sure you understand your Exposure when using these products.
I have put in a Support Email to TDDirect asking them how I can trade within the Normal Share Account I hold with them. As yet I have not received a reply - so I intend to chase in the next few days if I have received nothing. I would like to get the ability to trade these Products setup so I can act when I feel the need.
I bet your brain aches now, mine certainly does - although that is fairly normal…..