Brokers Steal from Elderly Widow
(Dec 2013)
In our day-to-day work, we often come across brokers willing to ruin the lives of the undereducated or underprepared in order to make a quick buck. We thought we'd highlight a particularly egregious example of this from a recent Financial Industry Regulatory Authority (FINRA) press release.
According to the release, Fernando L. Arevalo and Jimmy E. Caballero encouraged an "elderly widow with diminished mental capacity" to sell two annuities for approximately $300,000 and then moved the funds...
Monte Carlo Simulation, Explained
(Nov 2013)
Valuing products with exotic derivatives can be difficult since these products typically have complex payoff formulas. One of the most flexible methods for valuing such products is called Monte Carlo simulation. At SLCG, we use Monte Carlo simulation in a lot of our work, so we thought it would be helpful to explain a bit about it and show how it can be used to estimate the future returns of an asset.
The basic idea behind Monte Carlo simulation is to determine the statistical properties...
Variable Annuity Fees Linked to the VIX -- Part II
(Nov 2013)
In our last post, we discussed a whitepaper that proposed linking the fees in a variable annuity to the CBOE Volatility Index (VIX). That paper ran a simple backtest of a variable annuity fee tied to the VIX over the period from 1990-2012, assuming certain parameters, and then compared the result to a fixed fee annuity over the same period. We have replicated their approach between January 1990 and January 2013 and found that not only are the fees and ending account values comparable, but so...
Variable Annuity Fees Linked to the VIX -- Part I
(Nov 2013)
We've discussed the CBOE Volatility Index -- known as the VIX-- many times before. Essentially, the VIX is a very complex calculation of the expected future variance of the S&P 500 (see the full calculation methodology), and is popularly known as the 'investor fear gauge'. The VIX is not a tradeable asset, but there are VIX options and futures contracts, and those contracts serve as the basis for several VIX-related exchange-traded products (TVIX, XIV, VXXto name a few). The VIX is very...
Fidelity to Launch Mutual Fund Based on Hedge Fund Strategy
(Oct 2013)
We see it again and again: complex investment strategies packaged into traditionally conservative investments. We have seen corporate debt linked to exotic derivatives positions (structured products), exchange-traded products linked tocomplex futures positions (commodities and volatility ETPs), variable annuities linked to options strategies (structured product based variable annuities), and even certificates of deposit with complex payoff structures (structured CDs). Now, we are seeing more...
SLCG Research: Structured Product Based Variable Annuities
(Sep 2013)
In 2010, AXA Equitable began issuing a new kind of variable annuity that, in addition to traditional mutual fund-like subaccounts, also included an option for a structured product-like crediting formula linked to an underlying index such as the S&P 500. Our firm had done a lot of work on both structured products and variable annuities, so in late 2011 we started analyzing the structured product embedded in AXA's product, eventually writing a short research paper on the subject which we...
Illiquid ETFs and SEC Market Maker Incentives
(Sep 2013)
There is now nearly $1.5 trillion invested in exchange-traded products (ETPs) in some 1,400 exchange-traded funds and exchange-traded notes. However, not all of that huge sum is distributed evenly. Some funds, like SPY, have huge assets under management, while many others struggle to top $10 million. Often, issuers will close lightly-traded ETPs (leading to substantial turnover each year), but if they don't, the market price of an ETP can often deviate from the net asset value of its...
Variable Prepaid Forward Contracts
(May 2013)
Recently we've been working a lot with variable prepaid forwards (VPFs) in our casework and we decided to take a step back and explain these complex investments. A VPF is an over-the-counter contract between two parties involving a stock position, an upfront payment and option positions. VPFs are often used to defer taxes on appreciated stock, which has been a matter of some controversy.
Perhaps the best way to explain a complex investment is by example. Consider an investor who purchased...
SEC Examination Priorities 2013
(Feb 2013)
Last week, the Securities and Exchange Commission announced their examination priorities for 2013 "to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk, and to support the SEC's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
For those that are unfamiliar, SEC staff conducts examinations of SEC registrants through their regional offices and headquarters
to determine...
Structured CDs: The Big Picture
(Feb 2013)
This week we have reviewed some of the issues surrounding structured certificates of deposit, giving an introduction, example offering documents (both simple and complex), the basics of FDIC insurance of these products, and a description of some of the tax implications investors should be aware of. We hope we have conveyed our reasons for thinking that structured CDs are complex and risky investments that, like structured products, are rarely suitable for retail investors.
But there is a...
