The investment attorneys of Gana Weinstein LLP have brought a claim on behalf of an investor who suffered substantial losses due to investment recommendations made by his Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) advisor, Craig Kinard (Kinard) a proprietary Merrill Lynch fund called the MLCXX6LSER Index (MLC Index). The fund is also referred to as “The Merrill Lynch Commodity Index eXtra—(Excluding Precious Metals) Excess Return Index.” The MLC Index was run at Merrill Lynch by Guido Graff (Graff), Director of Ultra Structured Solutions at Merrill Lynch.
The complaint alleged that the MLC Index is one of the most complex investment products that could be sold to a retail investor and consequently is suitable for very few investors. The strategy involves extreme leverage, commodities, derivatives, options, and swaps risk. Any investor without significant prior experience in all of these categories will not be able to understand the risks or likely performance of the investment under different market conditions. Indeed, in this case the risks and expected performance of the MLC Index proved to be too great a challenge even for the fund managers to understand. In addition, to these problems the MLC Index was offered by Merrill Lynch to clients subject to enormous costs and fees.
The MLC Index is an absolute return strategy investment fund in the long-short commodity arbitrate space. Absolute return investing seeks to produce positive returns over time regardless market conditions. Even when markets are falling, an absolute return fund is advertised to still have the potential to make money. Arbitrage strategies attempt to benefit from an assumed correlation between different market instruments or different markets.
According to the complaint, Merrill Lynch advertised the MLC Index as having “Low Volatility” and producing “Consistent Returns” to investors. The complaint alleged that Merrill Lynch provided investors with back testing data showing that the fund would have an annualized return of 6.77% and that from 2002 through 2011 the fund did not have a single negative return year.
The complaint alleged that Merrill Lynch failed to properly explain and disclose the main risks to arbitrage funds in that the hedging strategy, or the correlation assumptions, will not prove accurate. Add to this risk the enormous amount of leverage and arbitrage funds implode when exposed to only modest amounts of any type of volatility the fund has not planned for.
The complaint alleged that in July 2012 predictable rate movements caused the MLC Index fund to implode causing losses in excess of 50% to investors.
The attorneys at Gana Weinstein LLP are experienced in representing investors in proprietary fund and arbitrage strategies cases. These investments are highly complex and often times not suitable for any investor. Investors who have suffered losses may be able recover their losses through securities arbitration. Our consultations are free of charge and the firm is only compensated if you recover.