I. Portfolio Management Service
Over its online client trading platform, Saxo Bank (Switzerland) ltd. (hereinafter the “Bank”) will enable its client (each a “Client”) to follow strategies (each a “Strategy”) of different third party strategy providers (each a „Strategy Provider“). The Client acknowledges, that the services of the Bank are limited to following the relevant Strategy based on the model portfolios and trade signals provided by the Strategy Provider. Therefore, the Client acknowledges, that mainly the Strategy Provider will provide the performance relevant input. While the Strategy is implemented by the Bank based on research data provided by the Strategy Provider, there is no direct legal relationship between the Strategy Provider and the Client and the Strategy Provider therefore has no obligation or liability to the Client.
By signing the portfolio management mandate, the Client grants the Bank the authority to carry out all actions it deems appropriate in the name of the Bank but for the account of the Client to implement the Strategy selected by the Client. This encompasses investing in, subscribing in, selling and liquidating all kind of investment products mentioned in the portfolio management mandate.
The Bank cannot guarantee any performance and investment decisions may prove to be wrong in hindsight. The Client therefore carries the risk of misjudgments by the Bank and the Strategy Provider.
Please note that the Bank’s services are subject to costs that reduce any return. Such costs will be charged to the Client even in the absence of positive returns. The costs vary depending on the Strategy chosen. In addition to the service and/or the performance fee, transaction related costs (e.g. spreads, commissions, currency conversion fees) may be charged. Therefore, active trading in a Strategy may result in high transaction related costs.
The Client is able to choose between different Strategy Providers and Strategies with varying risk structures. Certain Strategies are implemented through the use of ETF products or margin products.
The risk profile of a Strategy is primarily driven by the asset class (equity, bonds and commodities) or by the investment instruments (long-only or margin products) used to implement the Strategy. Other factors, such as regional allocation (e.g. allocation in emerging markets), liquidity of investments and the model risk (i.e. the risk that the model on which the strategy is based does not work as expected) influence the risk profile of a Strategy.
More detailed information on the Strategies is available on the Bank’s online client trading platform.
The Bank establishes the risk profile of the Client based on his knowledge and experience, his/her risk capacity as well as his investment objectives and will allow the Client only to invest in Strategies that the Bank deems suitable based on the Client’s risk profile.
The Bank herewith informs the Client that typically there is a link between risk and return of a Strategy. Strategies with higher return expectations, generally carry a higher degree of risk than Strategies with lower return expectations.
III. Product Types
Investing in equities gives the shareholder an ownership right in the issuing company.
These are the primary risks associated with equity investments:
- Company risk: The value of equities is determined by factors intrinsic in the company (such as profit and revenue development). Furthermore, the value is influenced by developments in the sector or the region in which the company is active.
- Market risk: Apart from the market movements, the share price may be subject to other factors such as geopolitical or economic news. Equity investments may be very volatile.
2. Bond (fixed income)
Bonds are short to long-term debt securities that securitize a claim for repayment of a principal amount plus accrued interest vis-a-vis the issuer of the instrument.
These are the primary risks associated with bonds:
Issuer risk: The risk that the issuer (or guarantor) is not able to honor its obligations under the security (i.e. interest payments and repayment of the principal amount)
Interest rate risk: Increases in interest rate levels in general may have a negative impact on the price of the security on the secondary market.
It is important to note that bonds may trade below their nominal value during the term of the instrument.
3. Real Estate
Real estate comprises office buildings, retail and industrial premises, residential property and special real estate (such as hotels or hospitals). The variables that determine the values of a property are its locations, construction, equipment fittings and the variety of ways in which it can be used.
To mirror the Strategies, the Bank on behalf of the client does not acquire physical real estate property, but rather invests indirectly in property-related assets (e.g. the shares of listed real estate companies and real estate investment trusts (REITs)).
These are the primary risks associated with real estate investments:
- Liquidity risk: Real estate investments are generally regarded as illiquid. There is therefore a risk that real estate investments cannot be sold within a short period of time or only at a lower price level.
- Insufficient diversification: Investment risk is concentrated in specific sectors, countries, currencies or companies. This means investments in real estate are more sensitive to any localized economic, market, political or regulatory events.
- Lack of transparency: Property markets are frequently not transparent, and require precise knowledge of local circumstances.
- Interest rate risk:Real estate often reacts to interest rate changes in a similar way to bonds.
ETFs are listed collective investment schemes. Similar to classic collective investment schemes, ETFs may (depending on the ETF’s strategy) invest in various asset classes, such as equities, bonds, real estate or commodities. The value of an ETF is therefore determined by the value of its underlying investments, i.e. the assets into which the ETF invests. Accordingly, the Client should also read the risk disclosure related to the specific underlying product type (e.g. for a Bond ETF the Client should consult also the risk disclosure section “Bonds”).
ETFs are not actively managed by an investment manager, but rather mirror an index. The index can be reflected in two ways, either physically, i.e. through investments in index components, or synthetically, i.e. through the use of derivative instruments (e.g. swaps).
ETFs are, in general, highly transparent and less expensive (compared to classic collective investment schemes).
These are the primary risks associated with investments in ETFs:
- Market risk: ETFs are subject to the market risk of the assets they invest in or which are reflected in the index.
- Tracking risk: The return of an ETF can be lower than the return of the underlying index or benchmark, because the ETF may not be able to mirror the index exactly, may need to use hedging instruments or must use currency conversions or because of the fees that are being charged to the assets of the ETF.
- Counterparty risk: In case the index is replicated synthetically, there is a counterparty risk in relation to the swap/derivative counterparty. More detailed information including information on the total cost for the management and operation of the ETF, i.e. information on the Total Expense Ratio (TER), can be found in the relevant fund documentation.
5. Margin Instruments
Derivatives are financial instruments, which derive their value from another underlying asset (see therefore also risk disclosures on the relevant underlying). They can be traded on an exchange or off-exchange. Non-standardized derivatives that are traded off-exchange are referred to as over-the-counter (OTC) derivatives. Because most margin instruments are traded off-exchange prices are often unpublished and less transparent.
5.1 Types of Margin Instruments
These are the most common Margin Instruments, that are used for the implementation of certain Strategies:
Foreign exchange includes speculation on the differences in exchange rates. The foreign exchange market (also called the ‘forex market’, ‘FX market’ or ‘currency market’) is a global financial market that trades in all the world’s currencies. It is an over-the-counter (OTC) market, i.e. trading takes place outside trading venues.
Forex trading normally occurs by entering into spot transactions. A spot contract is a contract that involves the purchase or sale of a currency for immediate delivery and payment on the spot date, which is normally two business days after the trade date.
Forex trading, may be subject to the following risks (please refer to the relevant section below):
- Counterparty risk
- Country risk
Contracts for difference (CFDs) are arrangements between two parties, which speculate on the price performance of a certain underlying, such as shares, indices, currency pairs or interest rates. When the price of the underlying changes, the corresponding price gains or losses are mirrored by the CFD. If the difference is positive, the investor is paid the difference amount by the CFD provider; if the difference is negative, the investor must pay the difference to the CFD provider. Because of the potential for unlimited losses certain regulators have banned the marketing, distribution or sale of CFDs with additional payment obligations to retail investors.
CFDs, may be subject to the following risks (please refer to the relevant section below):
- Market Risk
- Counterparty Risk
- Liquidity Risk
- Financing Cost
5.2 Possible Risks related to Margin Instruments
Leverage When trading margin Instruments usually only a small percentage of the total value of the contract, called a margin, is required. Margin instruments are therefore leveraged instruments. Small price fluctuations can have a substantial effect on the margin deposited and the investor may be required to pay additional margin within a relatively short time. In case of failure to provide the required margin the position may be liquidated at a loss and the investor will be liable for any resulting deficit. The investor must therefore be aware, that a potential loss can be far greater than the value of the margin deposited.
Market Risk Unlike traditional securities, the return from holding a margin instrument varies non-linearly with the value of the underlying and other factors. Pricing of margin instruments is complex and the value of the margin instrument is depending on various factors such as the exercise price (in case of options), the remaining life, the volatility of the underlying, the interest rate level, dividends etc.
Counterparty Risk Margin instruments are concluded directly with another counterparty and therefore there is the risk of the failure of the contracting partner to abide by its contractually agreed payment or delivery obligations.
Liquidity Risk Many margin instruments are relatively illiquid, or "thinly traded," which tends to increase price volatility. Illiquid derivatives are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in an margin instrument may not be possible within a reasonable period of time.
Financing Cost The buyer of a CFD will be charged an interest rate, which mirrors the financing rate of actually borrowing the funds to invest. In case of a long position, the buyer will be required to pay financing costs at the market interest rate plus premium p.a. for the period during which the investor holds the position.
Volatility Exchange rates fluctuate depending on a several factors, including political situations, interest rates, monetary policy and inflation. Fluctuations are unpredictable, and the market could suddenly move against your interest. This will affect the price of a forex contract and related potential gains and losses.
Country risk Economic and political factors can alter the investment landscape within a specific country, which can generate risk for e.g. FX transactions.
6. Complex ETFs
Complex ETFs are ETFs (s. section “ETFs”) that use leverage or invest in commodities. Complex ETFs may therefore be subject to the following risks:
Leverage Complex ETFs that use leverage re-act very volatile. Small price fluctuations can have a substantial effect on the value of the ETF and the value of the ETF may not vary non-linearly with the value of the underlying and/or the benchmark.
Commodities are physical goods that are produced for instance by the mining or agricultural industry and which are standardized with a view to their use as underlying for a transaction. Commodities include energy, precious and other metals as well as agricultural products.
The value of commodities depends on the following factors: the supply and demand ratio, political and environmental events, transport, tariffs, tax limitations and government interventions (e.g. programs, embargoes, tariff changes). Commodity investments may be subject to extreme volatility.
Commodity (contracts) may become very illiquid in case of limited market activity. Such illiquidity may cause significant price changes.