The attorneys at Gana Weinstein LLP have been receiving investor complaints concerning advisors recommending what the advisors call hedge or bear market products to the investors causing large investor losses. These complaints often involve large holdings in derivative, leveraged, or inverse investment vehicles that are extraordinarily risky. Further, such investments are not bear market investments or account protection investments. These investments are usually leveraged bets against general market indices that have long time history of growth.
Two favorite advisor bets against the general market are leveraged ETFs and VIX related investments. An ETF is a registered investment trust whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs differ from other ETFs in that they seek to return a multiple of the performance of the underlying index or benchmark or the inverse or opposite performance.
To accomplish their objectives non-traditional and leveraged ETFs typically contain very complex investment products, including interest rate swap agreements, futures contracts, and other derivative instruments. Moreover, leveraged or non-traditional ETFs are designed to achieve their stated objectives only over the course of one trading session, i.e., in one day. This is because between trading sessions the fund manager for the ETF generally will rebalance the fund’s holdings in order to meet the fund’s objectives and is known as the “daily reset.” As a result of the daily reset the correlation between the performance of a leveraged ETF and its linked index or benchmark is inexact and “tracking error” occurs. Over longer periods of time or pronounced during periods of volatility, this “tracking error” between a non-traditional ETF and its benchmark becomes compounded significantly.