Credit Default Swaps on Steroids: UBS's Willow Fund
(Jan 2014)
We previously published a working paper on how investors in Oppenheimer's Champion Income Fund lost 80% in 2008 when peer group funds lost about 25%. Our Champion Income Fund paper is available on our website. Oppenheimer had increased Champion Income Fund's exposure to CMBS through credit default swaps and total return swaps in 2007 and 2008. Figure 1 reproduces a figure from our 2010 paper which demonstrates that the leverage Oppenheimer took on through the swaps fully explained the...
Another Example of Non-Traded REITs' Wealth Destruction: Columbia Property Trust (Wells REIT II) Cost Investors $4.4 Billion
(Jan 2014)
Non-traded REITs are illiquid investments, not listed on public exchanges and with little to no secondary market trading. Their offering documents typically claim that after some period of time, perhaps 5-10 years, the REIT intends to list on an exchange, merge with another company, or in some other way allow investors to sell their shares but for many non-traded REITs, this "liquidity event" never occurs.
However, even if a non-traded REIT lists on a major exchange, that does not mean that...
El Uso de Apalancamiento en Los Fondos Cerrados UBS Puerto Rico Magnifica Las Pérdidas
(Jan 2014)
Durante el año 2013, los fondos de bonos de UBS Puerto Rico sufrieron grandes pérdidas. Estas pérdidas fueron agresivamente rápidas, especialmente considerando que los títulos de renta fija tienden a ser inversiones más seguras. En entradas anteriores a nuestro blog hemos argumentado algunas de las razones de las precipitosas pérdidas y hemos hablado de las sutilezas transaccionales de los bonos. Además, hemos discutido los conflictos de intereses entre los gestores de los fondos y los...
The Use of Leverage in the UBS Puerto Rico Closed-End Funds Magnified Losses
(Jan 2014)
The massive declines that hit investors in the UBS Puerto Rico closed-end bond funds in 2013 were especially quick and brutal for fixed income securities which are usually safer investments. In previous posts we have discussed some of the reasons for the precipitous fall in the values of the bond funds and some of the nuances of bond transactions that may have given rise to conflicts of interest between the fund managers and investors. In this post, we will discuss another culprit in the...
Behringer Harvard / TIER REIT Illustrates How Non-Traded REIT Sponsors and Brokers Have Siphoned $10 Billion to $20 Billion (and Counting) From Investors
(Jan 2014)
Sponsors have issued, and brokers had sold, over $85 billion of non-traded real estate investment trusts (REITs) by the end of 2012. These investments are illiquid, high-commissioned, poorly diversified real estate investments. Despite their glaring defects another $20 billion of non-traded REITs were sold to investors in 2013.
Sponsors and brokers have siphoned off at least $20 billion from investors through their sales of non-traded REITs up through 2012. We illustrate the calculation of...
Diversification and UBS Puerto Rico Bond Fund Losses
(Dec 2013)
The 19 closed-end bond funds managed by UBS Puerto Rico listed in Table 1 lost $1.66 billion in the first 9 months of 2013. These funds were sold almost exclusively to citizens of Puerto Rico and approximately 70% of the portfolios of these funds were invested in Puerto Rican securities. The percentage losses over the past year range from 38% to 48% for the worst-performing UBS PR funds. These losses are substantially greater than Puerto Rican municipal bonds generally. The Standard and...
Diversificación y Pérdidas de los Fondos de Bonos de UBS Puerto Rico
(Dec 2013)
Los 19 fondos cerrados de bonos administrados por UBS Puerto Rico presentados en la Tabla 1 registraron pérdidas de $1.66 billones de dólares durante los primeros 9 meses del año 2013. Estos fondos fueron vendidos casi exclusivamente a ciudadanos de Puerto Rico y aproximadamente el 70% de las carteras de estos fondos se invirtieron en títulos Puertorriqueños. En el último año, las pérdidas de los fondos de UBS PR con peor desempeño fluctuaron entre un 38% y 48%. En general, estas pérdidas...
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...
