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The Yield Enhancement Strategy Hits Wealthy Investors Hard

March 21, 2019 Blog

Financial advisors pitched the so-called “UBS Yield Enhancement Strategy” – or YES strategy – to their mostly ultra-high net worth customers. They sold it as a supposedly safe and efficient mechanism to enhance yield from generally conservative portfolios.

Wealthy investors were told that the YES strategy was a neutral or low-risk “Iron Condor” options trading strategy.

Here is what we have found from reviewing dozens of investor portfolios and consulting with several options experts.

The YES strategy at the end of last year faced a double whammy of problems that threw the strategy off course.

According to a recent interview in FINalternatives with Rick Selvala, the CEO of Harvest Volatility Management LLC, which manages over $9 billion in volatility-based strategies, Iron Condor traders need to be on the lookout for signs of extreme volatility.

“The strategy does best in choppy, side-winding, range-bound markets,” according to Selvala.

While the strategy can make money when the market goes up or down, it will be most challenged during extreme S&P 500 surges or collapses. Examples include: the financial crisis in the  fall of 2008, the flash crash of May 2010, the Euro debt and U.S. credit rating crisis in 2011, the Ebola scare in August 2015 and of course the recent downturn in December 2018.

Options teacher and trader Brad Castro, in an article on his website titled “Why I Won’t Trade Iron Condors,” made a stern warning against the strategy.

“Iron Condors can be merciless birds who devour large chunks of your capital,” he wrote.

“If the stock remains within a certain trading range during the holding period, you can generate very high ROIs based on the capital you place at risk,” he noted.

However, if the market moves against the Iron Condor’s structure, such as in moments of extreme volatility, the trade can’t repair the strategy, Castro warned. The best hope is try to move out of the way at the last minute, cut your losses and pray that the market’s “body blow turns into a glancing blow,” he added.

The other catalyst for the recent YES strategy losses appears to be the amount of leverage portfolio managers were using. After reviewing numerous accounts, we believe the leverage in some client portfolios was many times the mandate amount.  As we witnessed in the 2008 financial crisis, leverage and volatility can be a lethal combination.

So, what are wealthy investors to do?

Many investors are now fighting back seeking to recover their losses in FINRA investment fraud arbitration cases against UBS and other firms.

They claim that their financial advisors misrepresented the YES strategy. They also claim that they were never told the details about the mandate and leverage involved.

It’s unusual for wealthy investors to bring investment fraud claims against their brokers; it’s also rare to see a supposedly neutral strategy go so wrong.

Ultra-high net worth investors have legal rights too.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.