Retail Investors Have Lost at Least $27.7 billion as a Result of Non-Traded REITs
(Apr 2014)
As part of our effort to help investors avoid non-traded REITs, we have written over 25 blog posts on this defective investment type. We have noted in our research that because of high costs, illiquidity, lack of transparency and conflicts of interest, non-traded REITs should underperform liquid, low-cost traded REITs. A number of our blog posts including our post on the early trading in NYRT last week, titled "NYRT's Listing is More Evidence That Even the Non-Traded REITs Winners Are...
Structured Product Based Variable Annuites are Riskier Than Advertised
(Feb 2014)
My colleagues and I have a paper in the current (Winter 2014) Journal of Retirement about structured product based variable annuities (spVAs), which are variable annuities with index-linked accounts that have a payoff similar to structured products. We have been following the market for spVAs since they were first introduced in 2010, and distributed our first working paper in 2011. Since then, three issuers have sold more than $3 billion worth of spVAs, according to a recent article in...
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...
A Look Into the TIC Industry
(Oct 2013)
So far, we've discussed some of the concerns we have with TIC investments and shown how to use discounted cash flow analysis to value a TIC interest with our handy spreadsheet. But you might be asking, just how prevalent are these concerns across all TICs?
To answer that, we examined 194 sets of offering documents for TICs sold from 2004-2009. This totaled $2.2 billion in equity, which amounts to approximately 19% of all equity issued by TICs in that period, and included properties from 32...
What is Black-Scholes, Anyway?
(Sep 2013)
In the past, we have reviewed the basics of options as well as included some discussion of more exotic options, such as binary options and barrier options, but we haven't talked in detail about option pricing. There are a lot of great models for valuing options, but they can be a bit intimidating for the uninitiated, even though the underlying ideas are simple.
Any option's value is dependent upon the probability and timing of payouts. For example, how much would you be willing to pay for an...
Options Strategies Embedded in Exchanged Traded Products
(May 2013)
In theory, exchange traded products (ETPs) can be linked to almost any underlying asset, including derivatives. While many ETPs are linked to portfolios of bonds or stocks, some are linked to portfolios of futures contracts, which we have discussed at length before. Bill Luby at VIX and More has written a couple posts on ETPs that are linked to portfolios of options, which are gaining some traction with investors. As usual, we greatly enjoyed Bill's posts and thought we'd explain some of the...
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...
So How Complicated Can Structured CDs Get?
(Feb 2013)
We could tell you that the last time we went fishing we caught a fish that was THIS BIG (motions with outstretched arms), but you probably wouldn't believe us unless we showed you. We wanted to take this opportunity to show some examples of truly complex structured certificates of deposit that have been constructed in recent months and years.
Let's take a look at JP Morgan's August 2012 fifteen year "Callable Variable Rate Range Accrual CDs Linked to 6-Month USD LIBOR and the S&P 500 Index"...
What Does a Simple Structured CD Look Like?
(Feb 2013)
Okay, we've talked a bit about what structured CDs are and why we think they are interesting. But what does a structured CD offering document actually look like? Unfortunately, it isn't possible to find such documents from Bloomberg or the SEC website since structured CDs are not registered securities. However, you can often find offering documents using Google. For example, as a relatively simple equity-linked CD, we're going to take a look at the "Global Opportunity Certificate of Deposit...
