The catchier an investment’s title, the extra you need to ask: What’s the catch?
Simply contemplate YES. Supplied to rich advisory shoppers of UBS Group AG, YES stands for Yield Enhancement Technique. Who doesn’t love attending to sure? And who wouldn’t need to improve yield?
YES, whose holdings peaked round $6 billion in mid-2018, successfully borrows in opposition to shoppers’ holdings at UBS and makes use of the proceeds to commerce choices. The product is akin to a margin mortgage in opposition to current holdings; losses might compel an investor to place in further money or securities.
Though shoppers say UBS monetary advisers advised them the technique was conservative, in actuality it typically embedded dangerous bets that markets would keep placid—gambles on which many traders misplaced 20% or extra. The Securities and Alternate Fee is wanting into the way it was marketed.
The SEC declined to remark. UBS didn’t reply to questions on a regulatory inquiry.
YES, mentioned a 2017 advertising brochure, “seeks to restrict publicity to vital upside or draw back market strikes” and will “generate extra money movement from decrease yielding property.”
YES “has restricted correlation with the market or a single inventory place,” so it might provide diversification, mentioned the doc. Utilizing choices methods for cover, “we put together for unexpectedly unstable market circumstances.”
In current weeks, I’ve spoken with greater than a half-dozen shoppers who say UBS monetary advisers advised them YES would ship constant earnings at minimal danger.
Anthony Di Benedetto, a retired entrepreneur and guide within the renewable-energy business, says he misplaced roughly 15% on YES between 2016 and 2019. UBS, he says, made the technique appear “foolproof in its potential to guard the draw back.”
If he had been clearly advised that YES might produce massive losses when shares stumble, “we might have run out the door,” says Mr. Di Benedetto. “No means would we’ve got risked shedding a considerable quantity of our capital simply to make 3%.”
Like each shopper I spoke with, he says UBS fostered the impression that YES would generate constructive returns regardless of how shares carried out.
UBS disputes that.
“To make sure that clients might bear the dangers of the technique, UBS typically restricted participation in YES to traders with a internet price of $5 million or extra,” says a spokeswoman for the agency. “The advantages and dangers of the YES technique had been clearly disclosed to our shoppers, and so they acknowledged in writing that vital market actions might lead to losses and that they need to not take part within the technique until they had been ready for the potential of huge losses.”
YES is “aggressive and carries a excessive diploma of danger,” warns web page two of this system’s six-page account settlement, including that shoppers might “lose the principal invested.”
Nonetheless, “shoppers had been all advised in gross sales shows and advertising supplies that the product was hedged and safety was in place to attenuate losses,” says Jacob Zamansky, an lawyer at Zamansky LLC in New York who represents greater than 60 traders in arbitration circumstances involving YES. “They had been advised it was a conservative technique with a constant 3% to 4% upside, when in truth it had large draw back danger.”
YES relied largely on an choices approach recognized amongst merchants as an “iron condor.” If shares don’t lurch wildly up or down, it could generate constructive returns.
When the market does swing sharply, nevertheless, iron condor and different choices methods can expose investors to severe losses, as UBS supplies warned.
That’s not all, says Craig McCann of Securities Litigation and Consulting Group Inc., a analysis agency in McLean, Va. Analyzing greater than 50,000 YES trades, SLCG argues that they had been typically equal to bullish bets on inventory—delivering steep losses when shares went down.
An individual accustomed to how YES is managed says SLCG’s interpretations are “inaccurate” and “false,” tainted as a result of SLCG offers expert-witness testimony in opposition to brokers and their corporations. Had YES been totally uncovered to shares, says that particular person, it wouldn’t have misplaced cash in 2019’s bull market.