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Wall Street’s Worst ‘Doublespeak’—The Yield Enhancement Strategy

April 16, 2019 In The News

Wall Street is notorious for saying one thing to investors and meaning something else.

It’s called “doublespeak,” language that deliberately obscures, disguises or distorts the meaning of words. The term was coined after the great British writer George Orwell used the term “doublethink” to describe a reality that was completely distorted, where down was up, freedom equaled slavery and war was really peace. 

Meet Wall Street’s version of doublespeak, the UBS Yield Enhancement Strategy, or YES. UBS pitched YES as a low risk strategy to augment yield on conservative portfolios. The yield was supposed to be generated through a so called “Iron Condor” options trading strategy. The strategy entailed the sale of options on the S&P 500 Index, which purportedly had limited or capped upside and downside exposure.

UBS solicited clients to dedicate a portion of their existing accounts as collateral for the YES strategy. The firm represented that the YES strategy would enhance the income stream generated and, thus, their overall returns on these assets.

This is where the doublespeak comes in. UBS portrayed the YES strategy as providing higher overall returns for clients, without increasing their risk.

Words like margin and leverage – the core of the YES strategy – were never used. Instead, investors were told that something called a “mandate”  would be tacked on to their portfolios.

According to Webster’s dictionary, mandate is a “command or authorization to act in a particular way.” The word mandate is not synonymous with leverage, margin or high risk.

When the S&P 500 experienced extreme volatility in December 2018, YES investors were stunned to learn that they lost a staggering 20% of their mandate amount!

After reviewing dozens of investor portfolios and consulting with options experts we have learned that the YES strategy does best when markets trade within a narrow band. If the portfolio remains within this band, the investor can generate sizable returns on his or her investments.

To be clear, the YES strategy can make money when the market goes up or down. But it will be most challenged during extreme S&P 500 surges or collapses. Think of the 2008 financial crisis; the May 2010 flash crash; the 2011 Euro debt and U.S. credit rating crisis; and the 2015 Ebola scare.

Options trader Juan Sarmiento in “The Hidden Dangers of Iron Condors” said it best, “I have been trading options for nearly 16 years, and I would never recommend to anyone that they quit their jobs to trade any options strategy, let alone ICs (Iron Condors), unless they have a big bag of money to go through bad periods during which their strategy is either not appropriate or fails altogether. Be aware that the money at risk can all be lost at or before expiration.”

Investors report that they were not aware that the UBS-YES strategy used leverage of four to six times the so-called mandate amount. They had no idea that they could lose so much in an investment vehicle that was sold to them as “low risk”.

More doublespeak relates to the clients’ investment objective in their conservative portfolios. The UBS- YES options strategy account forms marked the accounts as “high risk” or “speculative”, the other end of the spectrum from conservative.

UBS advisors are now telling YES investors to “stay the course”  while YES tries to make back some of the December losses. Unfortunately, market sentiment portends more volatility which could drive more YES losses.

According to a recent Marketwatch article , the “volatility cavalry” is coming for the stock market. The article quotes  Alan Ruskin, global macro strategist at Deutsche Bank, that “not only has an inversion of the Treasury yield curve — a line plotting yields across all Treasury maturities that under usual circumstances slopes upward — sparked recession fears, it ends up that a prolonged shift to a flatter profile also portends a renewal of price volatility for stocks and other assets”.

And a recent “retreat by traders from an important corner of the U.S. financial system has some worried it could make the stock market more susceptible to shocks,” according to Dow Jones. “E-mini S&P 500 futures, a huge market where over $200 billion changes hands on average daily, are widely used on Wall Street to bet on market moves or protect against adverse stock swings. The futures have gotten harder to trade since volatility shook U.S. stocks last year, according to trading data and market participants.”

Investors deserve unambiguous communication from their brokers, not broker babble or doublespeak.

Low-risk investors should just say No to YES.

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.