Investor Lawyers Blog
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.