Structured Product Fees and Credit Risk
(Nov 2013)
Kevin Dugan noted in the April edition of Bloomberg's Structured Notes Brief that "Citigroup collected the highest average fees in the first quarter [of 2013] among the 10 biggest underwriters of U.S. structured notes." This got us wondering, is there any relationship between the credit quality of the underwriter and the fees the underwriter collects? If investors truly understood credit risk, issuers with higher credit risk would presumably have to structure products with lower fees to...
'Tailored' Exchange Traded Funds
(Nov 2013)
Issuers of new exchange traded funds (ETFs) have a problem: how to attract enough investment to keep the fund alive. ETFs have a relatively high turnover rate, and many of the funds that fail simply never gained significant assets under management. Also, if the fund is not traded frequently, it is likely to have a wide bid-ask spread, further reducing investor interest.
One solution that a few ETF issuers have recently adopted involves building ETFs with a particular customer in mind. Back in...
The Consequences and Implications of TIC Investments
(Nov 2013)
The research we have outlined all this week strongly suggests that TIC interests are exceptionally poor investments. We have focused our posts on what a thorough due diligence on the TICs should have revealed at the time of issuance. But you may be wondering, what happened to these TICs? What sort of returns did investors receive?
To our knowledge, there is no retrospective study of TIC returns. But in our experience, the vast majority of TIC properties suffered significant impairments during...
Conflicts of Interest in TIC Investments
(Oct 2013)
We have been discussing the value of TICs from a financial standpoint, but like most private placement investments, there are many other factors to consider than just the numbers. TICs have a wide array of problematic features that retail investors might not think to look for.
For example, most TICs require unanimous consent of all investors for major decisions regarding refinancing or selling the property. A TIC can be sold to up to 35 investors, making unanimous consent extremely difficult....
Welcome to Tenancies-in-Common (TIC) Week on the SLCG Blog
(Oct 2013)
Today, SLCG posted a new research paper, Large Sample Valuations of Tenancies in Common . In it, we value 194 TICs, totaling $2.2 billion in equity and representing approximately 17% of the TIC industry from 2004 to 2009. Our paper complements our earlier research on TICs ("What is a TIC Worth?" and "Private Placement Real Estate Valuation"), and is the most extensive empirical study of TICs to date. This week we will be summarizing the results of our research in a series of blog posts. But...
Just How Risky Are Leveraged and Inverse ETFs?
(Oct 2013)
Leveraged and inverse exchange-traded funds (ETFs) are some of the most volatile securities traded in public markets. They are designed to track a specific index, except multiplying daily return of the index by a positive (leveraged) or negative (inverse leveraged) factor. The 'daily' part is important: leveraged and inverse ETFs do not track the leveraged or inverse return of the index for any period longer than a single day due to portfolio rebalancing. You can find more details about...
The JOBS Act and Private Placement Advertising
(Oct 2013)
As per rules adopted in line with the 2012 Jumpstart Our Business Startups Act (JOBS Act), hedge funds and other private placements can now advertise to the general public. We have been covering this issue extensively here on the blog. While many sources suggested that this would unleash an immediate flood of new marketing, several sources have noted that there has in fact been remarkably few hedge fund advertisements so far.
Why? There could be several reasons. The first is that while the...
Volume of SEC Litigation Releases over Time
(Oct 2013)
Here at SLCG, we have spent a lot of time compiling and summarizing the SEC's Litigation Releases each Friday. You can find all of those weekly summaries on our blog -- 91 and counting! -- but we noticed that last week had a lot more Litigation Releases than usual. We also noticed the same thing at the end of last September. We wondered if there was a pattern here.
Being nerds, we wrote a program to count all of the SEC's Litigation Releases over the past 15 years. We aggregated them monthly...
Trouble in Paradise: UBS Puerto Rico Bond Fund Investors Hit Hard
(Oct 2013)
Despite a 2012 settlement agreement with the SEC, UBS Puerto Rico continues to face new allegations regarding its sales practices of tax-advantaged closed-end funds. While UBS Puerto Rico did not admit wrongdoing when it settled with the SEC, an SEC statement on the matter said "UBS Puerto Rico denied its closed-end fund customers [...] accurate price and liquidity information, and a trading desk that did not advantage UBS's trades over those of its customers." At the time of the SEC...
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...
