I am outraged by the action in the TVIX over the last month, but not quite in the same way as others.
For those who are trying to play catch up on the story, the Credit Suisse VelocityShares 2x VIX Short Term Futures fund lost 60 percent of its value at one point in the last week. The TVIX is a misunderstood product, and the action of the last week hasn’t helped VIX-based funds.
Some folks express outrage that the Securities & Exchange Commission approved it in the first place -- especially given this disclosure in the prospectus, which is bold-faced and underlined:
“The long term expected value of your ETNs is zero. If your ETNs are a long-term investment, it is likely that you will lose all or a substantial portion of your investment.”
Getting long volatility used to be done by buying options. Various exchange-traded products linked to the VIX give traders exposure to volatility without having to buy options and delta hedge. But option traders know that options -- at least those that are out of the money -- have an expected long-term value of zero. So, should we ban options while we are at it?
About a month ago, Credit Suisse stopped creating new shares of the TVIX. It soon began trading for more than its net asset value, similar to a closed-end fund. That premium climbed as high as 89 percent immediately before it crashed. But that selloff only brought it back to its real value based on assets. So, over the space of a month, its performance was similar to that of the similar ProShares Ultra VIX Short Term Futures Fund (UVXY). Only those people who bought TVIX far above its real value got hurt when the premium got sucked out. Buying a security you don’t understand -- for almost twice what it's worth -- is a good way to lose money. (See the chart below, which compares the TVIX to the UXVY.)
Yes, this was all disclosed in documents. No one should buy a product without knowing the risks. And they shouldn’t be messing with a fund at huge premiums to net asset value. But the debacle still doesn't give much confidence that we're playing in a fair marketplace.
(Chart courtesy of stockcharts.com.)