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Taming the Beast: Wall Street's Imperfect Answers to Making Money by Larry Light

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Chapter 8

Not Just for the Rich: Alternatives

Mega-rich investors long have dabbled in high-end exotica not meant for the common herd. In the hushed finery of oak-paneled asset management firms, they would sip tea from gold-rimmed Limoges china, and listen to an obsequious, well-dressed adviser speak of currency plays, commodities positions, and hedging maneuvers—stratagems that rove far beyond the everyday realms of stocks and bonds. Many of these niche methods, after taking their licks in 2008, came back into favor with the fabulously wealthy and their cuff-linked coddlers.

But more and more, nonbillionaires are able to avail themselves of alternative investments, a rubric that encompasses all manner of things that fall outside the regular run of assets. Whether they should or not is another question. With a little study, stocks and bonds are readily understandable. Alternatives … not always.

The way to make money in alternatives, some smarties say, is to invest in money, specifically, in currencies. Here is an activity that is far, far, far out on the risk curve—big potential rewards or soul-shattering losses await. Much foreign exchange trading (known as forex or simply FX) occurs between large banks handling international payments or among multinational corporations, such as a Finnish electronics company that needs to buy components from a Taiwanese manufacturer. The fluctuations of foreign currencies against the dollar, the world’s dominant denomination and thus the chief ...

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