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Investors in Certain Volatility Linked Financial Products May Have Arbitration Claims

money whirlpoolInvestors who have lost money on the recommendation of their broker or financial advisor to invest in volatility related financial products may be able to recover their losses in FINRA arbitration.  As we discussed in a recent blog post, inverse volatility-linked investments are designed to return a profit when the market experiences periods of low volatility.  Unlike more traditional investments and corresponding strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is likely not a suitable strategy for the average, retail investor.  In fact, when volatility-linked ETFs first began rolling out in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”

Put simply, investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading).  Further, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs).  And when it comes to investing in derivatives, such as future contracts and options on futures, the majority of retail investors do not fully understand the extreme volatility and risk associated with these complex investment products.

Earlier this month, equity indices declined sharply following a steady rally in the prior 12 months that saw the benchmark S&P 500 stock index gain nearly 20%.  It was during this year-long market rally that many retail investors were lured into investing in inverse volatility-linked products, essentially seeking to capture even bigger gains, provided that there was no price correction.  However, the idea of shorting volatility, or betting on calm stock market conditions, is a strategy best suited for sophisticated, institutional investors.

Because of the complexity of volatility-linked products, including the fact that they are not designed to be purchased and held in the same manner as long-term investments in common stock, or mutual funds, these products are unsuitable for the average, retail investor.  Such unsuitable volatility-linked investment products include the following:

ProShares Short VIX Short-Term Futures  (SVXY)

ProShares Ultra VIX Short-Term Futures  (UVXY)

ProShares VIX Short-Term Futures  (VIXY)

VelocityShares Daily 2X VIX Short-Term  (TVIX)

VelocityShares Daily Inverse VIX Short-Term ETN  (XIV)

iPath S&P 500 VIX Short-Term Futures ETN  (VXX)

Nomura Next Notes S&P 500 VIX Short-Term Futures Inverse

Daily Excess Return Index ETN

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have sustained losses due to the negligence or misconduct of stockbrokers and financial advisors.  In particular, the firm has represented investors in cases involving non-traditional, or exotic investment products, including managed futures and leveraged and/or inverse ETFs.  Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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