In the alternative investment world, the most common question of all is, “How much are the yields going to be for this investment”?

Though it may seem like a straight forward question, it is anything but that.  In fact, depending on the investment market you are in, it can be one of the toughest questions to answer of all.

In this article, we will explain how yields can be legally quoted in various alternative investment markets such as private placement, managed forex, and managed futures.  In addition, we will also cover what to expect when speaking to someone quoting returns for an alternative investment. This will allow you to understand the laws associated with the investment market you are pursuing, while also helping you identify the true professionals amongst a growing crowd of inexperienced brokers.

Despite what many of the less experienced may think, there are strict laws that must be followed when referring to the yields of any alternative investment.  Since our blog focuses mostly on the private placement, forex, managed futures markets, we have provided a summary of each of their rules and regulations below.  Take a look!

Rules for Quoting Yields for Alternative Investments

Managed Futures:  For all licensed managed futures traders, yields must be audited and verified by the NFA/CFTC to solicit investors.  If you speak with a futures trader, ask for a performance history covering at least the last 3 years.  The numbers you will see are the actual yields which were achieved over that time, unlike with most private investments which offer hypothetical figures.   When quoting yields verbally, futures traders are ALLOWED to refer to past yields, but they must always state that those returns are not necessarily indicative of future results.  In addition, futures traders are NOT allowed to entice investors by showing the yields of one program, if the investor is not going to enter that specific program.

Managed Forex:  With private managed forex investments, there is really no regulatory body to govern these transactions. Though the NFA/CFTC has tried to implement new laws, they have made little to no effect on the growing private forex market. Due to this lack of regulation, yields are typically quoted very loosely, and even guaranteed at times.   Needless to say, forex trading is not easy, and no one can EVER guarantee consistent success without error.  In short, be very wary of yields which are verbally quoted, or any “track record” you are presented when dealing with private forex investments. In contrast, licensed forex investments are regulated and audited by the NFA/CFTC, similar to the futures market.  In this case, you can conduct due diligence rather easily, and assess a trader’s expertise by evaluating their past performance, licensing history, and client references.  When speaking with a licensed forex trader, he must state the yields in the same way as a managed futures trader.  Since they are under the same governing body, they have most of the same rules to follow in respect to quoting yields.

Private Placement:  In the world of private placement programs, yields MUST be quoted in a specific manner after a series of events have already occurred.  To remain legal, brokers must first have the client request information, agreeing that they have not been solicited, and then the broker can proceed to explain the details.  When covering the yields of the specific program they are referring to, private placement brokers must ALWAYS use the word “historical” when speaking to investors.  Unfortunately, many of the less experienced brokers break the law everyday by stating definite numbers, and guaranteeing specific yields.  Though many may think of the private placement market as generally unregulated, it isn’t.  The fact is, at any time, you may have several regulatory agencies watching over you, just waiting for you to slip up!

If we haven’t listed the investment you are interested in, simply ask yourself, “Is this is a private investment or a licensed investment I am evaluating”?

If it is a licensed investment, it is in your best interest to thoroughly research the laws associated with that market, and visit the website of the regulatory body which enforces them (ex. SEC.gov, etc.).  This will give you inside knowledge about how to conduct due diligence for your investment, while helping you to determine which claims of high yields are backed, or full of hot air.  Typically, licensed investments must be audited, which makes it easy for investors like you to see REAL performance, not hypothetical figures.

On the other hand if it is a private investment, you must take an entirely different approach. First, you must evaluate their claims and conduct thorough due diligence on their firm and personal backgrounds.  Second, you MUST be provided references, or some sort of proof that they are generating the yields they claim to be. Third, you must be willing to lose all of your money before you ever invest.  “Wait, why would you say that”, you may be wondering? Well, as you should know by now, private investments can pay off, but are quite risky in most cases. Remember, yields are always hypothetical in private investments, and though it may seem appetizing, most times it isn’t worth the risk.

In summary, no matter what type of alternative investment you are pursuing, always remember to pay special attention to the way the “broker” or “trader” is quoting the yields.  In many cases, this can even be used as a tool to determine if an investment is in fact real, and can make it very easy to spot “bad investments” and misleading brokers.  Think about it, if you were a successful broker or trader, would you risk it all quoting investment yields improperly?  On the flip side, if you were NOT successful, would you exaggerate returns and bend the rules to close the “deal of a lifetime”?

The answers are simple, just like the rules are.  Even though many brokers choose to not pay attention, you should ALWAYS play by the rules. Remember, EVERYONE is watching, and ignorance of the law is no defense.

InsideTrade LLC Staff
(412) 235-2855