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SSEK Investigates Harvest Volatility Management Strategies

Shepherd, Smith, Edwards & Kantas Investigating Firms Selling Harvest Volatility Management Strategies’ Collateral Yield Enhancement Strategy

The law firm of Shepherd, Smith, Edwards & Kantas (“SSEK Law Firm”) is investigating several firms that have been selling Harvest Volatility Management Strategies as a safe way for customers to earn extra income from their investment portfolio.  The long period of historically low interest rates that have existed since at least 2008 has resulted in the creation of a number of brokerage firm products that are meant to combat the low return investors receive in traditional income investments, such as money markets or CDs, but provide similar safety.

One such investment product that has become popular, but proven to be far riskier than represented to investors, is the so-called “Yield Enhancement Strategy”, or the “YES” investment.  We have previously written on the UBS Yield Enhancement Strategy and the number of investors who lost significant money with that investment when the real risk of the product was revealed in February 2018.

Other firms, including Merrill Lynch, Morgan Stanley, J.P. Morgan, Jeffries, Charles Schwab and Fidelity have been promoting a similar “Collateral Yield Enhancement Strategy” that is offered through Harvest Volatility Management.

Harvest Volatility Management

Harvest Volatility Management was founded in 2008 in New York as a Registered Investment Advisor.  The firm focuses on derivative asset management and other strategies that are meant to manage volatility, or to profit from volatility, using options.  In July 2018, Victory Capital in Cleveland, Ohio announced that it was buying Harvest Volatility Management, which reportedly was managing $12 billion in assets at the time.

According to Harvest Volatility Management, the Collateral Yield Enhancement Strategy provides “conservative position risk” that provides investors “additional yield without increasing or impacting existing portfolio investments.”  Effectively, the Collateral Yield Enhancement Strategy, like all of the various Yield Enhancement Strategies brokerage firms offer, is an options strategy whereby the firm writes options on an index that is meant to generate income for the customer.

The strategy typically does not require the customer to deposit additional money or investments, but rather, depends on the ability to “margin” the existing investments in the account.  Effectively, the brokerage firm uses the customer’s assets as collateral to write options and make a premium on those options.

The most commonly used strategy is known as the “Iron Condor” where the manager writes four options at the same time, on the same index with identical expiration dates, but different strike prices.  As long as the index stays relatively stable, the account owner keeps all of the premium.  However, when the market is more volatile, as it was in February 2018 and has shown itself to be at various other times over the last year, the premium on the options is not sufficient to cover the large losses.

An analysis of the Iron Candor strategy that most Yield Enhancement Strategies use and the flaws/risks of the strategy was done by Securities Litigation Consulting Group and can be viewed here. In that analysis, Dr. Edward S. O’Neal describes in detail the strategy as well as what went wrong with the strategy in February 2018 (and is destined to go wrong again).

Shepherd, Smith, Edwards & Kantas has been involved in various “Yield Enhancement Strategy” cases over the years, such as the Schwab Yield Plus fund and the Auction Rate Securities market that collapsed in February 2018.

These various strategies always attempt to suggest to investors that increased yield can be achieved without taking increased risk.  However, the markets simply do not work that way and increased yield always comes with increased risk.

If you or someone you know were placed in the Harvest Volatility Management Strategies or any other Yield Enhancement Strategy, please reach out to our securities fraud attorneys immediately.   Our law firm has a team of attorneys and consultants with more than 100 years of combined experience in the securities industry and securities law.

We use that experience to help investors recover wrongful losses through FINRA arbitration, court actions or other legal processes.  All communications will be kept strictly confidential and your consultation will be done with no charge or obligation to you.  Call or email us today.


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