Once again, Wall Street’s alchemists have concocted an investment product that was sold as safe and secure only to have it blow up in investors’ faces.
Certain investment banks, including UBS and Credit Suisse, have cooked up something called a “Yield Enhancement Strategy,” or YES, which is extremely complex and should be used – if at all – by large sophisticated investors like hedge funds, banks and endowments. These types of institutions have at least a shot at understanding the YES investments. Mom and Pop retail investors don’t stand a chance.
YES is touted as an investment strategy that is designed “ to generate returns through the strategic sale and purchase of SPX index option spreads,” according to UBS. “YES returns are incremental to the underlying asset returns and offer clients a way to potentially generate additional cash flow from lower yielding assets.”One of UBS’s and other investment bank’s common YES strategies is the use of the iron condor. In theory, an iron condor has a large probability of earning a small limited profit when the underlying security is believed to have low volatility.
Sounds great, right? Not so fast, buried at the back of the investment presentation are a series of dire warning to investors about buying YES.
Sadly, some investors are encouraged to select unsuitable and risky options strategies, like YES strategies, without full disclosure from their financial advisor concerning the significant risks associated with these investments.
“Significant market moves either up or down may result in losses,” according to the marketing materials. “Selling options involves a high degree of risk and is not suitable for all investors.”
The admonitions continue: “Suitability requirements include financial sophistication and the ability to withstand losses. During periods of high volatility positions may be adjusted, at our discretion, to seek to provide additional protection or to increase returns. This could potentially result in the realization of additional losses.” (Emphasis added.)
The YES strategy was sold to high net worth clients as a fairly safe and conservative strategy to generate additional yield in a low yield environment.
Clients were required to put up collateral they were willing to commit to the strategy. Unfortunately, with the extreme volatility experienced in the market in December 2018, the YES strategy backfired, according to investors. The unpredictable and largely unfruitful December market allowed few investors to profit.
Many YES clients were forced to put up additional collateral and incurred substantial losses in a purportedly conservative and low risk strategy.
Regardless, recent events have failed to dampen the enthusiasm for the strategy on Wall Street.
According to a recent article by Bloomberg News, “UBS is doubling down on exotic strategies to profit from the intensifying meltdown in the synchronized bull market.”
Bloomberg characterized the strategy as “risky business”. Credit Suisse said that the, “ securities are complex and risk backfiring if the market doesn’t move as divined.”
Once again, one of Wall Street’s purportedly low risk, high yield strategies is backfiring on investors. Without full disclosure from brokers and advisors or perhaps some deception, investors take a gamble on the market that is sold as a winning strategy but quickly reaps the negative consequences.
Investors, just say no to this YES mess.
Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog. Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments. UBS Puerto Rico Funds | Investment Fraud Attorneys
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.