Articles Tagged with VIX fraud attorney

shutterstock_146470052-300x205The 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.

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shutterstock_82649419-300x213According to BrokerCheck records kept by The Financial Industry Regulatory Authority (FINRA) advisor Felipe Henao Vargas (Henao), currently employed by Insigneo Securities, LLC (Insigneo Securities), has been accused by a customer of investing in a VIX related investment.  ETFs that invest in the VIX are part of a group of group of ETFs considered to be leveraged exchanged traded funds or Non-Traditional ETFs.

As a background, Non-Traditional ETFs behave drastically different and have different risk qualities from traditional ETFs.  While traditional ETFs seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class.  Non-Traditional ETFs are also used to earn the inverse result of the return of the benchmark.

However, the risks of holding Non-Traditional ETFs go beyond merely multiplying the return on the index.  Instead, Non-Traditional ETFs are generally designed to be used only for short term trading as opposed to traditional ETFs.  The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time.  For example, between December 1, 2008, and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent.  In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.

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