FKLI futures v stocks

The FKLI (Kuala Lumpur Composite Index futures) contract traded on Bursamalaysia Derivatives Bhd are an alternative trading instument compared to stocks on Bursamalaysia. Reasons for this are listed below. If you ever traded stocks and are considering futures on stock indices, this can be a good resource.

1 For stocks, you need at least Rm100,000 account to day trade meanigfully. RM100,000 because to make good money like RM2,000 to RM3000 per day, t least Rm100,000 value of shares must be bought.and sold, requiring a move of 2 to 3% on the cash index. To day trade the Bursamalaysia FKLI, you only need to open a $5,000 futures account (minimum amounts can vary by broker) to be able to trdde RM100,000 notional value of the basket of CI component stocks.

2 For disciplined traders who use live stops, the leverage in trading FKLI futures over stocks is a huge plus, in the region of 20:1, giving more bang for each RM.

3 You can watch the 20 largest capitalized tocks in the KLCI to get a very good idea of how the index is acting or is going to act. Getting a feel for all 800+ stocks in the broader Bursamalaysia securities market at a glance is impossible.

4 The best feature is the ability to short the market and profit from a down view.

5 Risk management. Holding a FKLI position (long or short) exposes the trader to market risk only, eliminating stock specific risks of holding any stock. Volatility swings are thus smaller and makes for good risk management.(notwithstanding the fact that leverage provides higher risk/return characteristics)

5 Less volatility. Apart from only exposing the investor/trader to only market risk and not stock specific risk, futures are inherently less volatile, not withstanding the fact they provide high leverage and hence fluctuation in P&L. A stock can go from say RM5 to RM0.35, which is a move of well over 95%, but you won't see that sort of move very often in the stock index futures.

6 Index portfolio: Holding one FKLI contract is actually buying(or shorting) an index portfolio (notional value about RM50,000 worth at time of writing) of the 100 blue chip stocks traded on Bursamalaysia Derivatives, and provides for very effective use of funds to gain/reduce market exposure. This is because of the low margin requirements.

7 Studies have shown that incorporating commodities or index futures into a traditional stock or bond portfolio can enhance returns significantl. As Karl Gerald in an article on futuresource.com states:

The ability of futures to enhance the returns of traditional investments has been documented in a study conducted by Goldman Sachs. Covering a 25-year period, the study concluded that by "allocating only 10% of a securities portfolio to commodities, investors can vastly improve their performance." Goldman Sachs' conclusion, concerning the value of commodities, was supported by another study published by the Chicago Mercantile Exchange (CME), one of the world's pre-eminent futures exchanges. According to the CME study, "Portfolios with as much as 20% of assets in managed futures yield up to 50% more than a portfolio of stocks and bonds alone." (Please refer to chart below)
CHART

A further study by the Chicago Board of Trade in their booklet, "Managed Futures, Portfolio Diversification Opportunities" showed similar results.
Chart

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