Fortitude Capital – unregulated bonds offering up to 12% per annum

Correction 26.10.18: The initial version of this review speculated that one of Fortitude Capital’s investors was MJS Capital plc. This was based on a note in MJS Capital plc’s last accounts stating that it had a forex investment with a UK limited company run by a former director of MJS. Ajaz Shah, the director of Fortitude, has emailed us to say that he is not the former director of MJS running a UK forex company in question, and that Fortitude has never managed funds for MJS.

I can clearly state that my company Fortitude Capital Ltd has never managed funds for MJS Capital Plc. From my knowledge through the one day that I was a Director for MJS (May 2017), I was aware that MJS had access to multiple traders. I was not involved with the MJS latest account filings and had no involvement with the way these were compiled.

I am happy to set the record straight.

The previous version of the review also noted that Ajaz Shah was a director of MJS Capital for a single day, and that he was listed as a director in MJS Capital’s literature. Shah has told us that MJS Capital’s literature was “completely incorrect” and emphasised that he was only a director for a single day.

For an updated review of Fortitude Capital’s bonds, read on.

Fortitude Capital is offering unregulated one year bonds paying interest of 8% per year. A Fortitude representative has told me that they also offer unregulated five year bonds paying 10% per year, although I’ve only seen the literature for the one year bonds.

Selected introducers are offering enhanced terms whereby the interest rate is increased to 12% per annum for investments above £50,000, 11% for investments between £25,000 and £50,000, and 10% for investments between £10,000 and £25,000.

Fortitude Capital intends to use its investors’ money for “algorithmic trading” in the foreign exchange (forex) market.

Who is Fortitude Capital?

The Managing Director of Fortitude is Ajaz Hussein Shah. As mentioned in the above correction, Shah was previously a director for a single day of MJS Capital plc, an issuer of similar unregulated bonds. Companies House shows that Shah was appointed as a director of MJS Capital plc on 15 May 2017 but removed the same day. Shah has emphasised that he was a director of MJS for a single day only, and described MJS literature which listed him as a director “completely incorrect”.

Fortitude’s other director is non-executive director Heinz-Jorg Jansen.

According to its latest confirmation statements, Fortitude Capital is 100% owned by Ajaz Shah.

Fortitude Capital was incorporated in March 2013, but its accounts show that it was largely dormant until the 2016/17 accounting period. The latest accounts show net assets of £742,000 as at March 2017, compared to a nominal £100 for March 2016. The accounts were unaudited due to the company’s small size.

Update 26.10.18: Shah has drawn our attention to Fortitude’s latest accounts, dated 31 March 2018, which now show net assets of £7 million (predominantly £12 million in investments and £5 million in creditors). Investors should note that these accounts were not audited by an accountant due to Fortitude’s small size. For the same reason they did not include a profit and loss account. If investors plan to rely on these accounts when deciding whether to invest, they should obtain professionally audited accounts from Fortitude as part of their due diligence.

Dependence on a single investor

Shah has stated in an email to us that he holds over 75% of Fortitude’s assets under management.

Therefore, my own investment on to my platform is more than 3 times the amount that has been raised through bonds.

Any investment firm where a single investor holds 75%+ of the assets under management has a risk of being over-reliant on that investor. Even if that investor is a director, they have the same right as any other investor to withdraw their investment to spend or reinvest elsewhere.

As part of their due diligence investors should ask Fortitude what contingency plans they have if Shah decided to withdraw his investment.

How safe is the investment?

These investments are unregulated corporate loans and if Fortitude defaults you risk losing up to 100% of your money.

The purpose of the bonds is to allow Fortitude to speculate on forex using algorithmic trading strategies.

If Foresight fails to make sufficient returns from its forex trading, or for any other reason Foresight runs out of money to service these bonds, there is a risk that they may default on payments of interest and capital to investors.

According to one of Fortitude’s introducers, “the algorithm has been designed around the principle of Capital Preservation, so that the majority of trading risk is offset by sophisticated use of arbitrage and hedging techniques”. Nonetheless, no matter what efforts Fortitude makes to reduce risk, there remains a risk that it does not make sufficient returns to pay up to 12% per year to bondholders, on top of its other costs, and return their capital when it falls due.

Fortitude’s information memorandum is clear in this regard, with pages 2-3 including the risk warning:

Investment in the Bonds carries substantial risk. There can be no assurance that the Company’s investment objective will be achieved and investment results of the Company may vary substantially over time. This may affect the Company’s ability to pay interest on the Bonds and to redeem them at maturity, and investors therefore may suffer a partial or complete loss of their investment in the Bonds.

and making clear that the company will only accept investments from professional, high net worth or self-certified sophisticated investors, or high net worth companies.

Shah has stated in his email to us that

Our platform is consistently positive, with no losses at all. Our equity curve has always and still in a positive direction. [sic]

While I have no reason to doubt Fortitude’s successful returns to date, there is a wealth of academic literature showing that very few investment managers will consistently beat the market over time, and the inherent risk of Fortitude Capital failing to make sufficient returns to pay out 8-12% over a year remains.

Should I invest in Fortitude Capital bonds?

This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.

As with any unregulated corporate bond, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment offering yields of up to 12% in a year should be considered very high risk. As an individual security with a risk of total and permanent loss, Fortitude’s bonds are higher risk than a mainstream diversified stockmarket fund.

Before investing investors should ask themselves:

• How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
• Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?

If your priority is “capital preservation”, you should not invest in unregulated investments with a risk of 100% capital loss.

The investment may be suitable for high net worth and sophisticated investors who will already be well aware of all of the above risks, are looking to invest a small part of their assets in corporate lending, and feel that the return on offer (up to 12% over one year) is sufficient for the risks involved in lending to a small unlisted start-up company.