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Dire warnings about volatility-linked funds come from the funds themselves

Credit Suisse, the bank behind a volatility-linked note that imploded last week, says it was never meant to be an investment. Better known by its ticker symbol “XIV,” the exchange-traded note (ETN) allowed investors to bet on declining volatility and was only meant for sophisticated investors over one-day periods, according to Tidjane Thiam, the Swiss bank’s CEO.

The prospectus says “if you invest for more than one day, you will likely to lose all or a substantial portion of your investment,” Thiam noted in a conference call today, and said it has “zero long-term value.” When asked whether the bank expects legal repercussions from the note’s collapse, the executive said Credit Suisse is in a “reasonable position” because of these disclosures and because others companies actually distributed the product.

Some ordinary investors may not have read the warnings: An arbitration claim was filed against a Florida firm for allegedly advising a client to place much of their life savings into securities tied to volatility, according to a statement. The products had characteristics like XIV.

Part of the reason Credit Suisse is being singled out is because its inverse-volatility securities were more popular than others, and also because its product essentially evaporated last week, which it was designed to do after a steep decline in value. XIV and other products inversely linked to the VIX index of volatility came unhinged after the gauge had its biggest one-day percentage rise ever.

The 179-page prospectus (pdf) from Credit Suisse does indeed contains dire warnings. And although it will soon cease trading, there are a number of similar securities still attracting hundreds of millions of dollars in inflows, according to Bloomberg.

This is what those investors are getting themselves into, according to highlights from the prospectuses for exchange traded funds and notes that track volatility:

😬 ProShares (SVXY, UVXY, VIXY): “The longer an investor’s holding period in these Funds, the greater the potential for loss.”

😰 UBS (EXIV, EVIX): “The Securities are only suitable for a very short investment horizon.”

😱 Credit Suisse (XIV, ZIV): “The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.”

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