Investors who bought into Credit Suisse’s Velocity Shares Daily Inverse VIX Short Term Exchange-Traded Note (“XIV”) on the recommendation of their broker or financial advisor may be able to recover their losses in FINRA arbitration. As we discussed in several recent blog posts, inverse volatility-linked investments are designed to return a profit when the market experiences periods of calmness, or low volatility. However, unlike more traditional investments and strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor.

By design, Credit Suisse’s XIV was structured to provide investors with the opposite return of the CBOE Volatility Index (the “VIX”), or the so-called ‘fear-index’, and was thus essentially a bet that the market would remain calm. Earlier this month — as the market’s prior 12-month rally gave way to a sharp rise in volatility and an approximate 8% loss in the S&P 500 index, this inverse or short volatility trade proved to be an absolute train wreck.

As stocks returned all the year’s gains in trading on Monday, February 5, the VIX skyrocketed to 37 by close of trading, an increase of 95%. Unsurprisingly, many inverse volatility-linked investment vehicles sustained massive losses. Among the hardest hit ETNs was Credit Suisse’s XIV, which plunged approximately 90% in value. In light of XIV’s losses, Credit Suisse recently announced that the last day of trading for VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note will be Tuesday, February 20, 2018. Credit Suisse has elected to trigger an accelerated liquidation of XIV because the product could no longer perform as it was designed.

Many retail investors in XIV — as well as other hard-hit inverse volatility positions including ProShares Short VIX Short-Term Futures ETF (which collapsed in value by approximately 97%) — sustained massive losses. Of concern, these investors may well not have understood, or been informed by their financial advisor, of the extreme risk associated with investing in such complex and exotic investment products. At a minimum, investors who are steered into inverse volatility-linked products as XIV should be fully informed of the following characteristics and risk components of such investments:

• XIV TRADING – XIV trades like a stock, and can be bought, sold, or sold short during market hours, including pre-market and after-market time periods;
• NATURE OF INVESTMENT – unlike a stock, however, XIV does not give an investor a share of a corporation or business enterprise. There are no sales, no profits, no quarterly reports, and no prospect of ever receiving dividend income;
• XIV VALUE – while XIV’s value is set by the market, it’s value is tied to the inverse of an index that manages a hypothetical portfolio of the two nearest-to-expiration VIX futures contracts;
• RISK ASSOCIATED WITH FUTURES – because there is no way to invest directly in the VIX, investors are left to invest in products tied to highly risky and complex futures contracts and options on futures. On a daily basis, investors in volatility-linked products such as XIV were subject to the daily roll of VIX futures contracts — at market close, a portion of the shorter-term contracts were sold, and longer-term contracts were purchased in their place. Because futures contracts have a finite lifespan and regularly expire, over time volatility-linked ETFs and ETNs may encounter substantial difficulties in tracking an index’s performance;
• COMPOUNDING RISK – investment vehicles such as XIV are designed to be held for a single trading day, as compounding risk can otherwise significantly impact the performance of the investment. During periods of higher than normal volatility, compounding will cause results to vary from the underlying benchmark or index, with the effect being more pronounced as volatility increases.

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 or investment advisors. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

Investors 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 newcases@investorlawyers.net for a no-cost, confidential consultation.