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Dear Investors,

We received various e mails, read posts in threads etc. from people who are very worried. It seems various other forex funds are going down or bad or are down already(?). Also people wrote about leverage and seem over concerned about this. We understand this concern. August has been a horrible month in Foreign Exchange in general. It is not only some funds that have done bad; also whoever I speak working as a bank trader tells me: “we want to forget August as soon as possible” Well, I tell you , it was not easy. Especially when you just start and get confronted with such a horrible market. Now, what happened exactly in August? Well actually nothing and a whole lot. If you compare most currency prices as per the 1st of that month with the ones of the 31st of that same month you wouldn’t see much difference. The thing was the moves in between which always came very unexpected and very vicious or aggressive.

When you are “in” such a move you are directly inclined to think that a given currency is going to make a big (trending) move against an other one. Usually it works that way. Not so in August.

Once the whole market was, say a move up, that particular currency pair started tanking immediately where, needless to say losses were suffered. Off course these things happen from time to time, but in August it happened ALL the time.
On the ways up and on the ways down….

Look at whatever currency chart: Pounds, Eur/usd, Usd/yen, Eur/yen. And you will have that visualized. Fortunately we worked all the time with stop losses and we never had a very large leverage (I will come back on this later). As you can imagine, funds which were highly leveraged and did not have stops placed close by must have lost a fortune. Once again I would like to stress out that August really was an exception on the rule and I am sure that other funds, if they are given the time and money will recover from this. Ibiza traders has a very conservative approach and we managed to make a profit. Further mind you, that in spite of the stops we place currently our positions are guarded 24 hours a day. Personally I barely sleep during the week and make it up in the week ends. I apologize if therefore some e mails, messages remained unanswered.

About leverage. It is a word that is used very often, by many people, and regrettably we noticed that most people do not fully understand what leverage is all about.

I will give you an example. Some of you most likely know that if you have $ 10.000 in your bank account your bank will allow you to purchase stocks up to a counter value of $30.000. The result will be a debit balance of $ 20.000,- This is a “leverage” of 1:3. As collateral hereof you have a stock portfolio of $ 30.000,- so your bank has no problem with this! The picture changes however if your stocks decline towards $ 20.000. In that case the bank will liquidate a part of your stock until you are back within the 1:3 relation. In foreign exchange this isn’t any different. However the leverages used are MUCH higher, depending on your broker. Some brokers allow a leverage of 1:200
This means if you hold $ 10.000 with your broker your trading amount can increase up to 200* $ 10.000 = $2.000.000,-!! Now if you consider that 1 cent over $ 2.000.000 means $ 20.000,- in result either that trader/firm will be bankrupt after such a move either made a profit of 200%. At Ibiza traders we do not work with leverages like that.

In principle we stick to a 1:5 leverage on opening a position. If the position goes well and “runs” into the money we will increase to say 1:10. Off course we keep a close stop loss as in case it turns back against us our leverage will be quickly brought back from 1:10 to 1:5 again. Leverage is very normal and nothing to be afraid of. It just needs to be monitored very carefully. In this respect it is also pointless to do more DD, checks, account control etc etc. I assume most of you read about Amaranth by now: a hedge fund that just lost $ 6 billion in energy trading. They were very legit, DD’d, knowledgeable people, but somewhere down the line something went wrong in their internal risk management.

Last but not least: Of course Ibiza traders is a currency fund. Currency funds characterize themselves as high risk per definition. That’s why we can pay out the yields we are paying. Also here the old adagium is applicable: do not play with money you can not afford to loose! And doesn’t that apply to any market that pays off more as the average bank deposit percentage?

I hope I have clarified and taken away some of the fears and misunderstandings that (might) live with some of you!

I thank you for your trust and attention.

With kind regards

Peter Ris

Director

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