FAQ - frequently asked questions

This is a set of professional services related to the management of assets of wealthy individuals, aimed at achieving their financial goals. This range of services may include financial and tax planning, portfolio management, risk management, investment strategy development, legal and tax advice, and other financial services.

Wealth management involves taking into account the individual financial, legal, family and other characteristics and circumstances of the client. Typically, the approach is based on the client's financial goals, investment horizon, risk tolerance, as well as special circumstances and requirements.

The specialization of IQ Smart Capital is revealed in the development of unique investment strategies aimed at obtaining expected returns using quantitative methods of risk diversification.

Our strategies are a combination of active and passive management methods, based on quantitative methods of capital allocation and portfolio parameters. Our main goal is to generate income and get a positive Alpha for the client!

IQ Smart Capital creates value for its clients through planning, developing and maintaining a system of up-to-date asset data for the client's portfolio, including risk parameters, profitability, economic historical and forecast metrics, such as SGR, Exp.Growth EPS, EVA, etc.

If certain parameters and metrics can be calculated, then they can be managed. In other words, we help our clients make smart investment decisions!

Before starting our cooperation, we recommend you to order a free consultation of a general nature to clarify financial, legal, family and other important circumstances. In order to become a client of the company, it is necessary to fill out the (1) Investor Profile Questionnaire (Investor Profile.PDF), (2) the Risk Tolerance Questionnaire (Risk Tolerance.PDF) presented on our website.

Then, after consultations and financial planning, it is necessary to clearly formulate the goals, the investment horizon, your expectations regarding the return on the investment portfolio. Subsequently, on the basis of this, the investor will need to make a decision regarding the specific list of assets that will comprise his portfolio.

The company's client can be novice or experienced investors who have the status of a qualified investor, who have reached the age of majority, who are not a citizen or tax resident of the United States. Citizens of the Russian Federation and Belarus, politicians, high-ranking officials, high-ranking civil servants cannot be a client of the company.

To conclude an agreement, it will be necessary to prepare and sign: (1) a copy of the internal passport; (2) a copy of the international passport; (3) a copy of the identification number; (4) an application confirming tax residency; (5) an extract from a brokerage account held in your name; (6) notarized written consent of the spouse (wife) to conclude the contract; (7) a statement confirming the status of a qualified investor.

The service agreement with IQ Smart Capital is concluded in writing and signed by an authorized representative of the company. The contract is signed in four copies (one copy for the client and his spouse, and two copies for the company). Usually a service contract is signed at a personal meeting in the office, but in special cases it is possible to sign the contract at the client's office.

We consider the following international brokers to be optimally convenient and beneficial in terms of security and possible commission costs: Interactive Brokers; Charles Schwab; TD Ameritrade. The investor can independently choose any licensed broker at his own discretion, but we recommend you always check whether the broker has a license, and we do not recommend brokers registered in dubious jurisdictions of exotic countries, etc.

An individual brokerage account is opened through the broker's website remotely. During registration and account opening, the investor will need to go through the verification and confirmation of identity procedures provided by the broker company. The account opening procedure has a number of complexities and features that the investor needs to know in advance before the account registration procedure. To do this, we recommend ordering a consultation on organizational issues related to opening an account with an international broker.

For a medium-term and long-term investor who does not plan to trade intraday, the “Cash” account type is best suited, that is, a brokerage account without the use of borrowed capital from a broker. The "Margin" account type usually provides an opportunity to receive a loan from a broker secured by the amount of capital deposited by the account holder.

With this type of account, the investor will be exposed to greater risk, since with high fluctuations in the value of the portfolio, there is a high probability of a “Margin Call” (non-compliance with margin requirements). And this may lead to the forced closing of open portfolio positions by the broker. In this case, losses will be deducted from the deposited capital of the account holder.

Having an account type "Cash", the investor creates a portfolio by acquiring assets for an amount not exceeding the capital that he deposited into the account. In this case, the broker's money is not used in the investor's portfolio and there is no risk of a "Margin Call" (non-compliance with margin requirements).

For the purposes of accounting and portfolio performance analytics, all settlements on an account are usually carried out in one base currency. The broker usually only allows you to select one currency to set as the base currency of the account. All money transferred by the investor to the brokerage account will be automatically transferred by the broker to the base currency of the account (if the funds are credited to the account in the base currency, then the funds are immediately credited to the account without exchange operations). For investors who want to invest in the US or Canadian stock market, the USD is fine. For investors who want to invest in the European stock market, it is better to use GBP or EUR.

The fact is that there is a so-called implied currency risk, that is, the risk of changes in the exchange rate of the base currency against the currencies of other countries. If an investor, for example, purchases assets that are nominated in another currency, he must first buy the required currency by paying with the base currency of the account. When closing this position, the investor will have to make a reverse exchange operation and exchange capital denominated in another currency for the base currency of the account. In some cases, the broker does this automatically and credits the investor's account in the base currency.

But, most importantly, the profit received from an asset (nominated in another currency) may be less due to the difference in the exchange rate, if the base currency of the account strengthens. As a result, the profit received in the base currency of the account is completely different. In addition, there is inflation, which also needs to be taken into account when analyzing the real, and not the nominal, return on an investor's portfolio.

The most convenient way to fund an individual brokerage account is to transfer funds from your bank account (card or current) through the SWIFT system. The payment is credited within 24 hours, the fees for transferring funds depend on the fees of your bank. Before making a transaction, the bank will require the account holder to go through the procedures prescribed by law (KYC, AML). These may be requirements to confirm the origin of funds, signing a statement of commitment not to invest funds in sanctioned companies, etc. For more detailed consultation, please contact the bank that serves you.

In Ukraine, as in most countries of the world, there are two main taxes associated with making a profit from investments. This is a tax on passive income received from dividends (Dividend income tax), and a tax on investment profits (Capital gain tax). In accordance with the tax legislation of Ukraine, these taxes must be independently calculated and paid annually by all taxpayers before August 1 following the reporting year (paragraphs 179.5., 179.7. Article 179 of the TCU).

An investor, a resident of Ukraine, have to pay: (1) Tax on passive income received from dividends on preferred shares (Dividend income tax: 18%) - in accordance with clause 167.5.1. articles 167 of the TCU; (2) Tax on passive income received from dividends accrued by non-residents (Dividend income tax: 9%) - according to clause 167.5.4. articles 167 of the TCU; (3) Tax on investment income (Capital gain tax: 18%) - according to paragraph 164.2.9. article 164, and paragraph 167.1. article 167 of the TCU. In addition, all taxpayers will also have to pay a military tax of 1.5%.

In order to transfer your brokerage account under the management of a professional investment advisor (or Investment Manager), you must first register an individual account with a broker in your name. Then you need to formalize the transition through the account transfer procedures provided by the broker. Also, another procedure is possible, when an investment adviser only initiates the opening and registration of an account with a broker in your name. Then you go through the registration and account opening procedure yourself through the broker's website according to the general rules for opening an individual brokerage account.

If an investor wants to independently control and manage a portfolio on a brokerage account, then he does not transfer the account under the management of an investment advisor or a professional investment manager. The investor independently forms an investment portfolio on his brokerage account, independently makes investment decisions, selects assets, opens positions, creates orders for the purchase / sale of assets (shares of companies, real estate funds, ETFs and other available instruments).

Tracking the effectiveness of the investment portfolio, analyzing assets, tracking company metrics, risk and return parameters of the portfolio, the investor can entrust IQ Smart Capital. If an investor wants to independently analyze and track portfolio parameters, portfolio performance and profitability metrics, economic data on companies in the portfolio, then the brokerage platform usually provides the investor with fairly wide opportunities for this. A modern brokerage platform usually has customizable reporting features for the entire brokerage account.

Typically, an investor, having his own unique investment approach, determines the strategy for forming positions in the portfolio and regularly reviews and manages these positions. Usually it all depends on the investment horizon and the risk parameters of the investor. Portfolio positions are usually reassessed every quarter after the reporting season ends and overall market volatility decreases. According to statistics, after the publication of financial statements of companies, major market players make decisions within 1-2 weeks. But some passive investment strategies involve reviewing positions in the portfolio once every six months or once a year (at the close of the calendar year).

Risk diversification is needed in order to reduce the unsystematic risk of each individual asset. If companies (or assets) are represented in the portfolio, then they have their own risk (volatility), which is usually a consequence of the influence of internal and external factors of the business environment, the sector of the economy and the entire economy as a whole. The company may have problems with competitors, failure to meet the stated sales plan, or environmental problems, a production accident is possible, etc.

All this can affect the company's profit and, as a result, the mood of investors. At some point in time, the price of a company's stock may fall or rise faster or slower than the sector and the market. In order to minimize this (individual) risk of an asset, diversification of the non-systematic risk of the asset (the standard deviation of the asset price from its average value) is needed.

In addition, there is also the systematic risk of an asset, the so-called Beta - this is the coefficient of sensitivity of an asset to fluctuations in the entire market (for example, the S&P500 index). This type of risk also needs to be diversified and mitigated, since the risk cannot be completely eliminated, it can only be minimized and accepted.

The investment time horizon is one of the important factors for an investor and his investment strategy. To achieve the goals, the investor must determine for himself on what time horizon he wants (or can) achieve his investment goals. The investment horizon cannot be considered separately from investment goals, since it takes time to achieve the goal. In addition, the investor must be aware that there is also the speed with which his investment goal can be achieved. So, the investment horizon will depend on the speed of achieving the goal.

If the investor's goal is a specific amount needed in the future, for example, to buy a house, then knowing the initial investment amount, it is possible to calculate both the investment horizon and the target (expected) rate of annual capital growth. But here you need to keep in mind the inflation factor, which will also annually reduce the real purchasing power of the investor's capital. That is why the expected (target) rate of capital growth will need to be adjusted for the expected inflation rate, in the currency in which the investment portfolio will be formed (or in the currency in which the investor's goal will be determined).

With regard to investment goals, everything is very individual, for example, for someone the goal will be capital gains for the future purchase of a yacht and / or a country house on the lake. For another investor, the goal may be to preserve and increase capital for personal consumption at a certain age (essentially, a non-state pension). The goal of the investor may also be the accumulation and growth of capital to finance the expensive education of children or grandchildren. Everyone determines the investment goals and the required target amount for himself, but you need to take into account your current age and the initial investment amount, from which the investment horizon and the target (expected return) capital growth rate will be calculated.

In addition, you also need to take into account your risk tolerance, which will affect the expected annual return (capital growth rate). The risk cannot be eliminated, it can only be mitigated and diversified, and the target (expected return) rate of capital growth will largely depend on the level of risk tolerance. Usually, the older the investor, the lower the risk tolerance, and therefore the more conservative (less risky) the investor's portfolio should be.

A more conservative portfolio contains less risky assets and, as a result, has a lower expected return. Conversely, a less conservative (more risky) portfolio has completely different risk and expected return parameters. In any case, the investment horizon, risk tolerance, and target (expected return) rate of capital growth of the portfolio must be calculated individually for each individual investor.

The expected return and risk of an investment portfolio are the individual parameters that an investor's portfolio has. The risk parameters are portfolio volatility (Standard Deviation) and portfolio systematic risk (Beta). Usually they depend on the investment goals of the investor and on the investment horizon. But they also depend on the investor's tolerance for risk. When developing an investment strategy, these parameters need to be calculated, balanced and accepted as a possible (hypothetical) behavior of the portfolio value in the future. An investor's portfolio can behave quite unpredictably, fluctuations in the value of the portfolio can be significant or minimal. All these parameters of risk and return are calculated and laid down when developing an investor's investment strategy for a certain investment horizon. Each year, the investor's portfolio parameters need to be adjusted as the investor's age and risk tolerance change.

In addition, in different economic cycles, the risk and return parameters of the portfolio need to be adjusted and measures taken in advance to minimize the risk of losses and undesirable consequences of the upcoming downturn in the economy. The risk and expected return of a portfolio are very closely related, the more risk an investor takes on, the more likely it is to receive the expected return in the future. Conversely, the less risk an investor takes on, the less likely it is to receive the expected return in the future.

Typically, the expected return of a portfolio is considered as the potential return of the portfolio in % per annum +/- some % of the possible annual fluctuation of the portfolio. For example, the expected return is 18% per annum +/- 15%, as a result, the investor can receive the expected return either 18% + 15% = 33% or 18% -15% = 3%, or some other scenario (33% + 3%) /4 = 9%. But no one will ever be able to guarantee a specific return or any minimum return. Since it is believed that there is always an investment risk, it can only be mitigated, diversified and accepted. Therefore, special attention should be paid to the investment horizon, since in one year the investor's portfolio may have a low or even negative return, and the next year the return may be above average. In sum, based on the result of several years, the returns for different periods can balance each other and, as a result, the portfolio will have a certain positive value.

Everything is very individual and depends on the goals and horizon of investment, on the level of risk tolerance of the investor, on the amount of initial capital and the age of the investor. Much also depends on the specific family conditions of the investor. For example, on the number of family members, on the stability of the current annual income of the investor, on the degree of risk of the whole family. There are cases when an investor may urgently need a certain amount to pay for a medical operation or for other medical purposes for members of the investor's family.

Therefore, the determination of the risk and return parameters of the investor's portfolio must be approached very responsibly and seriously. To begin with, the investor needs to order the development of an individual investment strategy, fill out the necessary questionnaires, assess their risk tolerance, undergo several general organizational consultations, and only after that make a balanced decision regarding the expected return and risk. And the age of the investor in this case is not a determining factor. Age is one of several important factors, but not necessarily sufficient to make an informed decision about the return and risk parameters of a portfolio.

In order to self-determine their risk tolerance, the investor must independently study, reflect on and complete the questionnaires provided on our website: (1) the Investor Profile Questionnaire (Investor Profile.PDF) and (2) the Risk Tolerance Questionnaire (Risk Tolerance.PDF). The investor should fill in these files primarily for himself, in order to understand and evaluate all possible factors that may affect the risk and return parameters of the future investment portfolio.

Perhaps these questionnaires will need to be rethought and filled out in a new way, the main thing is to have confidence in the correctness and adequacy of the expected return and risk of your portfolio. In the process of further work with IQ Smart Capital, you will need to give us for analysis and further storage of one copy of the completed and signed by you questionnaires.

Evaluation of the effectiveness of portfolio management implies comparing the target (expected) values for the portfolio with the actual values on the horizon of one year. That is, the actual annual results of the investor's portfolio are evaluated (an assessment is carried out annually). Depending on the investor's strategy and investment horizon, Jensen's Alpha, Sharpe Ratio, Treynor Ratio can be used as evaluation metrics. Everything is individual, and mainly depends on the type of investor's strategy and investment horizon. To assess the performance of an investor's portfolio, one or two indicators are usually chosen.

If the investor's portfolio is dominated by US stock market assets (Stocks, REITs, ETFs, Mutual Funds), then the S&P500 index is taken as the market benchmark. The yield of the US 13 Week Treasury Bill, US 1Year Treasury, US 2Year Treasury, US 5Year Treasury, or the average value of one of these instruments over the past 5 years can be taken as the Risk-Free Rate. You need to understand that the risk-free rate is not a real or theoretical indicator, which actually does not exist, since there is always a risk, small, but it exists. Therefore, any of the above instruments can be taken as the risk-free rate.

In investment strategies of relative profitability (Relative Return Strategies), Jensen's Alpha (or just Alpha) is used to assess the effectiveness of investor portfolio management. This measure compares the return of a portfolio to that of a market benchmark (usually the S&P500), but adjusting the return of the market benchmark to the portfolio's market risk (Beta). Since an investor's portfolio can have different market risk parameters (Beta), for a fair comparison, the market benchmark return must be multiplied by the Beta of the investor's portfolio. In this case, the comparison will be fair.

Most importantly, the Jensen’s Alpha formula compares not just the absolute returns of the portfolio and the market benchmark, but their excess returns, that is, the actual return minus the risk-free rate. If, for example, Sharpe Ratio or Treynor Ratio is selected as an additional parameter for evaluating portfolio performance, then each of these indicators is calculated separately for the market benchmark (S&P500 index) and for the portfolio, and then they are compared with each other.

The absolute return reflects only the increase in the capital of the portfolio compared to the initial capital (at the beginning of the period), while not taking into account the level of risk (portfolio risk). But at the same time (other things being equal risk parameters) the market (S&P500 index) could actually grow much faster than the portfolio. This means that if an investor had invested just in the market (in the S&P500 index), he would have earned more. But, this is not always a good idea, since in some cases an investor does not need the excessive risk that would have to be taken by investing in the S&P500 index.

In addition, in practice, each investor has his own risk tolerance and for a number of reasons, the risk parameters of an investor's portfolio may be lower or higher than those of the market. Therefore, in order to correctly compare the results of an investor's portfolio with the market return, it is the return per unit of risk that needs to be compared. If the return of the investor's portfolio per unit of risk is higher than that of the market, then the investment strategy gave the investor a good result (despite the fact that the risk parameters of the investor's portfolio may differ from the market risk).

If it is correct to compare the portfolio return with the market return, then effective portfolio management creates a positive Alpha, which means that the investor's portfolio is more efficient than the market. It is important to understand that not only the portfolio has risk, but also the market (the S&P500 index). This leads to the conclusion that it is possible to invest either in the entire market or in a separate market sector or in an individual portfolio, the main thing is to understand what return the investor received per unit of risk.

A management fee is a payment for managing an investor's portfolio that does not take into account the performance of the investor's portfolio. That is, in fact, this is a payment for the services of the Portfolio Manager, who implements the investment strategy and manages the portfolio on the investor's individual brokerage account.

It is important to understand that the management fee in no way guarantees or obliges the manager to ensure the achievement of portfolio performance. Typically, the management fee is charged quarterly or annually, and depending on the strategy and the amount of assets under management (AUM), and the fee ranges from 1% to 2% of the amount of assets under management.

Performance fee is the amount charged by the Portfolio Manager for the result achieved on the investor's portfolio, which depends on the actual return of the portfolio for the period. Typically, performance fees are charged on a quarterly or annual basis. In essence, this is an incentive and motivation for the manager to achieve the investor's capital growth and earn a return for the investor and for the manager himself. This mechanism makes it possible to link the interests of the investor and the manager, as well as eliminate the conflict of interest.

In the investment world, a performance fee of 15-20% of the absolute capital growth of an investor's portfolio over a period is used. It should also be noted that charging a commission does not guarantee the achievement of the result or profitability of the portfolio. Since the risk always exists, no one can guarantee a certain level of profitability of the investor's portfolio or the absence of losses, the manager will only seek to find a balance between profitability and risk for a particular investor.

It is important to understand that the Portfolio Manager is just as interested in achieving the return of the portfolio as the investor, therefore, he acts in the interests of the investor and seeks, first of all, to reduce risk and increase the return of the portfolio.

The Gross return on Investment is the return on an investor's portfolio for a specified period BEFORE deducting Management fees and Performance fees. That is, this is the so-called "Total Return" - the value of the return on the investor's portfolio without taking into account the amounts charged by the manager.

Net Return on Investment is the return on an investor's portfolio over a specified period AFTER deducting Management fees and Performance fees. That is, this is the so-called "Net Return" - the value of the return on the investor's portfolio, after charging of all manager's commissions.

An individual investment strategy gives to investors an opportunity to have their own individual investment portfolio with required and predetermined risk parameters (Beta and Standard Deviation) and required level of expected return of a portfolio. Also, an investor's portfolio can have a quite good level of risk diversification (Standard Deviation), which in practice allows minimizing the dependence of the portfolio return on potential negative effects (price fluctuations) of each individual asset.

In a broader sense, an individual strategy is a so-called an Investment Vehicle that works constantly to achieve a goals in the med term and long term investment horizon. An individual strategy typically takes into account the unique requirements and needs of the investor, his risk tolerance, required diversification by country, by sector of the economy, by asset class. Also, an individual strategy can be aimed at the most progressive sectors of the economy, can combine companies of growth and value, can have risk parameters that the investor require.

Usually, everything is individual and depends on the goals and horizon of investment, on the amount of initial capital and on the age of the investor. The investor should understand that the market provides a wide range of opportunities in the medium and long term. The main thing is to formulate a goal and evaluate your level of risk tolerance in order to sleep well and normally perceive portfolio value fluctuations throughout the entire investment period.

The theory or hypothesis of the efficient market (The Efficient Market Theory) divided the investment world into two parts, those who believe in the efficiency of the market and those who do not believe in the efficiency of the market. Information about the market, about the economy, about market participants, or any other market-relevant information about asset prices in the modern information society spreads quite quickly and gives all market participants the same opportunity to make informed investment decisions.

This theory states that the market is efficient, since all the important information about the economy and/or a particular stock is already known to the entire market and is embedded in the price, so it is impossible to outperform the market and, as a result, it is impossible to get a positive Alpha. But since there are always companies that grow faster than the market or faster than their sector, the question arises why individual market participants do not know about this and do not buy shares of only these companies?

In practice, everything is much more complicated, information, its availability and speed of dissemination are not sufficient factors for making effective investment decisions. There is always something that influenced the price of a particular asset, the mood of market participants, and this is something very difficult to find and understand in advance until the price has reacted. Usually, when someone sells an asset, someone always buys it, and as a rule, both parties are absolutely confident in the reasonableness of their decision. This is why it is so difficult to find market inefficiencies and use them to generate more returns than the market.

"Light" in an efficient market can indeed be found, seen and accepted as an opportunity for positive Alpha. There are mathematical and statistical methods for calculating the parameters and ratios of each individual asset in an investor's portfolio. These techniques refer to quantitative methods of analysis and asset management, which are difficult to explain and interpret for an ordinary person who does not deeply know mathematics and statistics.

Each Asset Manager or Professional Advisor has its own well-established strategies and methods for analyzing assets, its own unique methods of managing and allocating capital. There are both active and passive portfolio management methods, but all of them are aimed at finding and using market inefficiencies to get a positive Alpha or to get a higher return per unit of risk than the market.