Many UBS investors have incurred unnecessary investment losses associated with an investment strategy at UBS (and other competing firms) referred to as a (YES) “Yield Enhancement Strategy.” UBS’s YES program is generally considered a complex short-option/short volatility strategy.
The UBS YES investment strategy marketed to high net-worth individuals whose primary overall investment objective was the safety of principal, income, or whose risk tolerance was overall moderate to low, but in reality, the YES strategy turned out to be very different.
In the 4th quarter of 2018, investors in the YES program lost approximately 20% of the capital they committed to YES. It is expected that investors lost a substantial more amount of money due to the coronavirus.
Generally, cash equivalents and fixed income securities were used as collateral for UBS to operate its YES strategy. In effect, investors with losses associated with the UBS YES investment strategy are feeling particularly burned because those losses were incurred in what was supposed to be the safer, more secure, and less volatile segments of their portfolios. UBS may want to try and tell a different story now, but for some investors, this is really the net result.
In many cases, the local branch UBS representative merely served as an intermediary between the investor client and the investment managers of the YES team in New York. UBS aggressively promoted its YES strategy throughout the country. Although the local branch UBS financial advisors may have introduced their clients to the program, most of them relied on the New York based investment manager who oversaw the UBS YES strategy, Matthew Buchsbaum. Mr. Buchsbaum, according to his FINRA Brokercheck report (as of April 2020) already has 21 pending customer disputes disclosed on his BrokerCheck record, including one for $100 million.
This investment strategy involves options that were marketed by some as a safe way to enhance the yield (or income stream) from an investment portfolio. Unfortunately, investors are now discovering unexpected and unnecessary investment losses in this supposedly safe strategy.
UBS (and other competing firms) represented to investors that a Yield Enhancement Strategy may provide a low-risk way to generate additional income. In reality, the investment strategy was fraught with risk that ultimately resulted in unnecessary and unexpected losses. There is demonstrable conflict in the manner in which the YES strategy was marketed internally to UBS representative and to UBS clients, and the paperwork that UBS now seeks to try and rely upon to defend its actions.
The UBS YES Strategy was a complex investment strategy involving option contracts and leverage, which has generated tens of millions of dollars in losses for clients and resulted in dozens of customer complaints. Those customer complaints are either informal complaint letters or have been filed as private arbitration customer disputes with the Financial Industry Regulatory Authority (FINRA).
As these cases unfold, it appears there is some evidence showing that, in November 2018, UBS saw that the equity markets were exhibiting increasing volatility. The UBS YES investment managers appear to have ignored some of those warning signs. In fact, UBS, continued to promote the YES strategy internally (perhaps due to the high fees associated with the strategy) to the field and its investor customers. Late in the 4th quarter 2018, particularly in December 2018, it appears the wheels came off of the UBS YES investment strategy and investor accounts fell precipitously. Upon information and belief, UBS stopped accepting new money in the YES strategy in mid-2019.
Volatile Markets Create Additional Risks
The Yield Enhancement Strategy was typically marketed as an investment strategy that could conservatively generate additional income. However, when the stock market becomes more volatile, as it did in the 4th quarter of 2018 (and in particular in December 2018), the investment strategy can cause significant unexpected and unnecessary investment losses and this was not always clearly disclosed (if it was disclosed at all).
After incurring losses, many investors were told to just “hang in there” and that the YES strategy would make up for those losses. In reality, the YES strategy was never designed to “make up” for losses as it was at all times simply a yield enhancement strategy (not a growth strategy).
These examples of volatility events occurred again in 2019 and were even more dramatic recently in the first quarter 2020. We are also learning that many investors, despite the dramatic losses that incurred in Dec. 2018, were convinced by the YES team to remain in the strategy based on (mis)representations that the strategy aims to make up the losses.
That has not happened, which may give rise to additional legal claims and issues based on that recommendation to “hold.”.
This investment strategy may have been (or may have become) unsuitably risky for some investors, particularly if it was recommended as a relatively safe or conservative income-producing investment strategy.
It’s possible that the financial advisor or firm that recommended the investment strategy may have failed to make adequate risk disclosures to investors regarding this investment strategy or may have failed to take reasonable steps to avoid unnecessary investment losses as the market became more volatile in recent months.
“Yield Enhancement” Options Investment Strategies, Including UBS “Iron Condors” Program, May Cause Unnecessary Investment Losses
In what appeared to be a low-interest rate and low volatility market, many brokerage firms and financial advisors, including well-known wirehouse firms such as Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS (among others) have reportedly recommended various options investment strategies to their investor customers as supposedly safe and efficient investment strategies to enhance income from their investment portfolios. However, when stock markets turn volatile, these investment strategies can quickly spiral into unexpected investment losses for retail investors.
Option investment strategies, particularly those strategies involving leverage (or margin) and naked options appear to have been recommended to investors by such well-known brokerage firms like Merrill Lynch, Morgan Stanley, Wells Fargo and UBS (among others). While these option investment strategies have reportedly presented some retail investors with opportunities to potentially generate some additional income by engaging in a sophisticated, and relatively complex options investment strategy, some of those investment strategies were also often fraught with unexpected and/or undisclosed risk. When it comes to yield enhancement options strategies, perhaps the most commonly used financial instrument is the extremely well-known S&P 500 Index (“SPX”), a stock market index based on the 500 largest companies with stocks listed for trading on the NYSE or NASDAQ. The Chicago Board Options Exchange (“CBOE”) is the exclusive provider of SPX options. In this regard, CBOE provides a range of SPX options with varying settlement ranges and dates, including A.M. and P.M. settlement, weekly options and end-of-month options. Significantly, because SPX is a theoretical index, an investor who engages in options trading using SPX will necessarily be engaging in uncovered, or naked, options trading.
An iron condor options strategy involves writing a series of option contracts, typically all at once or around the same time. The iron condor structure entails writing two near money option contracts that are short, in addition to purchasing two deeper out-of-the money option contracts that are long. The first component of an iron condor involves selling an out-of-the money put (short put), while simultaneously selling an out-of-the money call (short call). When implementing this first component of an iron condor — the investor is essentially betting that between now and expiration, SPX’s trading will remain range-bound between the two option strike prices — thereby ensuring that the naked option contracts will expire worthless and the investor will profit from the option premium earned.
In recognition of the substantial risks associated with short naked option contracts, the iron condor strategy involves a second component for purposes of risk mitigation. Specifically, the second part of an iron condor strategy involves buying a further out-of-the money put contract, as well as buying a further out-of-the money call contract. Thus, while the first two legs of the iron condor involve two extremely risky short naked options, the third and fourth legs of the iron condor seek to mitigate that risk with less risky long SPX options. Collectively, these four options trades, or legs, make up an iron condor strategy.
Ultimately, options strategies like the iron condor amount to bets in favor of time decay versus volatility. On the one hand, an investor can pocket options premium income in those instances where the option — which has a finite lifespan and fixed expiration and, therefore, is properly viewed as a decaying asset — goes to zero and expires worthless. However, on the other hand, periods of pronounced market volatility can quickly lead to scenarios where the option premium is dwarfed by losses due to market volatility. A volatility spike in the stock markets in early February 2018 or in December 2018 can cause substantial losses for some investors placed in so-called “yield enhancement” and other similar investment strategies premised on low market volatility.
Unfortunately, some investors get steered into unsuitable and risky option investment strategies without receiving full disclosure from their financial advisor concerning the significant risks embedded in options investing and/or hedging strategies. Investors who have sustained unexpected or unnecessary losses in connection with these or similar options investing may be able to recover their losses. In some cases, the recommendation by a broker or financial advisor may have lacked a reasonable basis in the first instance, or if the nature of the investment — including its risk components — were not properly disclosed or were otherwise misrepresented.
As this YES strategy is leveraged in the hopes of increasing potential returns, it is also complex and it increases the level of potential risk.
In these situations, some investors may not have been properly advised of those potential risks. Although Financial advisors may claim that these were unforeseen market events, the reality is that these are similar risks to those experienced in the 2008-2009 financial crisis. These potential risks (ie market volatility) were material risks that should have been properly disclosed to clients before recommending these investments individually or as part of a portfolio or investment strategy.
Investors Seeking to Recover UBS Yes Losses
For some investors, a private FINRA arbitration customer dispute enables them to bring a claim and potentially recoup their investment losses for UBS Losses. These customer disputes typically involve only paper discovery and no depositions, and they are generally faster and more efficient compared to traditional court litigation.
About Haselkorn & Thibaut, P.A.
Haselkorn & Thibaut, P. A. is interested in speaking to UBS investors who were sold the YES investment strategy. These investors may be able to provide valuable information and insight regarding UBS’s marketing and sales practices related to this program, or otherwise corroborate research and information we already have obtained. Haselkorn & Thibaut, P. A. is also interested in speaking to any former UBS Financial Advisors whose business was hurt by the YES investment strategy or the promotion of the same.
The law firm has reason to believe that approximately 600+ households were invested by UBS into the YES program. Only a small percentage of those households have sought to recoup their investment losses to date. UBS also appears to have generated substantial fees and revenue by recommending this YES investment strategy, in some cases possibly an equivalent annual 1.75% of committed capital, only to have the result to investors be a significant unnecessary loss in their portfolio.
Haselkorn and Thibaut is a nationwide law firm specializing in handling investment fraud and securities arbitration cases. The law firm has offices in Palm Beach, Florida, on Park Avenue in New York, as well as in Phoenix, Arizona and Cary, North Carolina. The two founding partners have nearly 45 years of legal experience. They have filed numerous (private arbitration) customer disputes with the Financial Industry Regulatory Association (FINRA) for customers who suffered investment losses relating to issues similar to those matters mentioned above. There are typically no depositions involved, and those cases are typically handled on contingency with no recovery, no fee terms. Experienced attorneys at Haselkorn & Thibaut are available for a free consultation as a public service. Call today at 1 888-628-5590 or visit their website at www.investmentfraudlawyers.com.
Donald S. Wiggins loves learning about business trends. He has 5 years of experience in financial news and worked his way up from a writer to a senior staff member. He is one of the original writers of alphabetastock.com with a goal to increase readership and financial news coverage throughout 2019. Wiggins is the editor and manager of “Services” category.