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Coronavirus and the UBS- YES Investment Strategy– A Dangerous Combination for Investors

February 28, 2020 Blog

How a Global Pandemic Could Impact Investors

  • The Coronavirus is Causing Great Market Volatility
  • The Yield Enhancement Strategy (YES) Has Been Hit Hard
  • YES Is Unlikely To Recover Losses  If The S & P Rebounds

The coronavirus and the fear of a pandemic is wreaking havoc on the stock market. The Dow Jones Industrial Average has fallen more than 3200 points for the week through the end of Thursday, a drop of 11% and the S&P 500 stock index dropped 4.4% on Thursday alone.

Many market watchers expect the stock averages to rebound after such sharp falls. We certainly don’t possess a crystal ball to know if they are right.

However, there is some history to having a rosy outlook regarding the markets after such steep drops. For example, the S&P 500 has shed more than 2% on a Monday 19 times since March 2009.

According to a CNBC article citing Bespoke Investment Group research, markets have returned 1% the day after these routs as markets have “been bought with a vengeance in the near term.”

The Bespoke research also found that in 17 of the 18 prior instances the S&P 500 also had a positive return over the subsequent week. And over the next month, there was an average gain of 6.08%.

The Connection Between the Coronavirus and Yield Enhancement Strategies

While those rebounds may cheer investors who own mutual funds or exchange-traded funds that invest in the S&P 500 stock index, other investors are likely in a tougher patch. Those include investors in the UBS Yield Enhancement Strategy, known as YES, or Harvest Volatility Management, CYES, who likely may not share the joy of the potential rebound.

As this blog previously reported, investors should “Just Say No to YES.” In complex jargon, the YES Strategy is a four-legged “bear call” strategy accompanied by a “bull put”. In simpler terms, UBS pitched the YES strategy to clients as a neutral or low-risk way to generate returns through an options trading strategy known as an “Iron Condor”. It has been anything but!

YES has seen tremendous losses in so-called “Black Swan” events like the February 2018 VolPocalypse, named after Cboe Volatility Index, AKA the VIX or “fear gauge,” and the high volatility at the end of December 2018. In the former, the Dow Jones tanked more than 1000 points twice in a week; in the latter, the market capped off a down year by posting losses of close to 20% for the quarter.

The current Coronavirus Dow Jones/S&P 500 meltdown is likely to cause similar pain to YES investors.

Sold as a supposed market neutral strategy, the YES-type investments seem to do their worst when there is high volatility, “vix-plosion” and are unable to recover in the near term.

To that point, YES lost 6% in the previously mentioned February 2018 VolPocalypse and another 14%  in December 2018.

A rebound of the S&P 500 is welcome, as is a bump in the price of holdings like tech, airline, and cruise ship stocks. But the YES strategy is a different animal. Investors need to beware of the hit it could cause to their portfolios.

If you’ve suffer a loss due to an UBS Iron Condor Investment or YES Investment, contact our law firm today!