Credit Suisse Pushes the Pause Button on TVIX


Wednesday, August 28th, 2013 | Vance Harwood

In February 2012 VelocityShares‘ TVIX ETN was on a tear.  Its volume surged from an average of 6.67 million shares a day in January to 22 million shares a day in February.   The assets under management (AUM) also grew dramatically.  At the end of January TVIX had $413 million in assets—fourteen days later it has $279 million more for a total of $691.0 million.   Credit Suisse, which is the firm that issues the notes associated with VelocityShares’ products put new TVIX share creations on hold February 22, 2012 citing: “internal limits on the size of the ETNs.”

Normally ETN issuers love assets because the investor fees (1.65% annualized in TVIX’s case) are a prime source of income, so we know this is something Credit Suisse really didn’t want to do.    The expectation is that ETN providers hedge their exposure when they issue shares, but this is not something that they provide any details or transparency into the inner workings.   When I was at the IndexUniverse’s Inside ETFs Conference in January 2012 I asked representatives of several of the ETN providers if in the interests of increasing the acceptance of  ETNs they were open to giving investors more insight into this hedging process.  I received a very clear answer—No.

If one were prone to conspiracy theories you could imagine the issuer of a long only volatility fund like VXX or TVIX might reasonably bet that the long term value of their fund would be zero—the ravages of contango almost guarantee that will happen eventually.  If that’s the case then why not dispense with all the messy hedging and just invest all the money in Treasuries?    The dark side of this scenario for the issuer would be if volatility spikes up and the market is wanting to redeem shares (return shares back to the ETN provider at the net asset value in exchange for money).  If they aren’t hedging their position they could be in trouble.

Credit Suisse’s action suggests that they are being careful in their risk management, and that for what ever reason (e.g., costs of hedging, distortions in the volatility futures market) they wanted to put a hold on growth.

Credit Suisse still allows share redemptions so arbitragers will insure that  TVIX’s value will not drop much below its indicated Net Asset Value (iNAV).  However with share creations shut down TVIX’s price can be at a   premium to TVIX’s iNAV (symbol ^TVIX-IV on Yahoo Finance).  Immediately after this announcement TVIX was trading at 17.01, almost a 6% premium to its 16.09 NAV.  For people long TVIX this is obviously not a problem, but anyone that is short is feeling some pain.   Fortunately ProShares UVXY offers a 2X short term long product that is very similar to TVIX, so there is a way to hedge a short position and provide arbitrage opportunities that will limit TVIX’s moves away from its iNAV.

Bill Luby fromVIXandMore and Kid Dynamite have both written excellent articles on this occurrence: Credit Suisse Suspends Creation UnitsUps and Downs of New Premium in TVIXTVIX Not Your Daddys’ Blue Chip Stock if you would like more information / analysis.

 



Wednesday, August 28th, 2013 | Vance Harwood
  • http://twitter.com/MikeMasland Mike Masland

    Great read, thank you. It may not happen in the immediate future, but one can surely imagine a very realistic scenario in which a few ETN issuers blow up at the same time. 

  • Maciek

    I’m wondering if it makes sense to try to arbitrage this situation? Is it worth it for 6%?

  • http://sixfigureinvesting.com/blog/ Vance

    Hi Maciek,
    Six percent is decent money in my book. The issues I see are availability of TVIX to short, and the length of the Credit Suisse pause. It might be a long time before TVIX syncs up with the iNAV again. I was surprised the gap stayed fairly stable yesterday. Made me think the arbitrage is tougher / riskier than I think.

    – Vance

  • Vance

    Hi Mike,
       Your welcome.   Yes, I agree that multiple ETN issuers could run into problems simultaneously.  The VIX Futures market is likely being heavily influenced by the rapidly growing ETNs–I wonder if there are some distortions that Credit Suisse saw (e.g., VIX futures starting to move SPX IV values…) 
    – Vance