XIV [VelocityShares Daily Inverse VIX Short-Term ETN] was the opposite of it. I don’t know if you remember XIV?

JA: I was going to ask you about that.

RW: Yeah, it was a -1x. That was a more sensible product. The interesting part of that one is that it was institutions that were buying this thing—some important institutions that really shouldn’t be dabbling in futures markets. But because these things trade on securities markets, they can. They can short things when they’re precluded from shorting. If you go to 2017, what you saw during the year was XIV was a money machine. It was because there was no volatility in the stock market. They were continuing to essentially earn this contango gain that VXX is giving up every day. And then what happened was there was one event. Given the distribution of that VIX futures index, the probability of a 100% event was not a zero, and they observed a 100% event where the VIX spiked up on Feb. 5. And if it spikes up by 100% and you’re promising -1x that, you’re in a little trouble. You can’t deliver.

Right now, it’s not really volatility that’s getting the limelight, it’s really crude oil. But the same set of problems are there, same sort of problems are in natural gas. And what you saw [in March] is one of the big fund families had a -3x and 3x on crude. They liquidated both of those funds. It turns out to be a reasonable move—they would have really been in trouble moving forward. But right now they still have -2x funds, and I wouldn’t be surprised if something happens on that front.

“It’s no different than going to a casino in Las Vegas. You’re making a short-term bet on something, and you happened to be lucky.”

JA: So you’re not a fan of leveraged or inverse ETPs. What’s the main thing that’s wrong with them?

RW: By trading these things, you’re allowing people who can’t get into the futures market access to strategies they shouldn’t have in the first place. All of the restrictions on the futures market were put there for a purpose: to protect the integrity of the markets and avoid the disasters that are currently happening in the leveraged and inverse markets. You’re putting things in the hands of people who don’t understand them. When people trade these different products, they believe they’re trading crude oil, for example. They’re trading crude oil futures—they don’t know it. These things trade enormously. USO [United States Oil Fund LP] traded 373 million shares today. Is that reasonable? What I mean is, this is a casino.

JA: So for leveraged ETPs, how does the daily price path of the index drive the difference between the return investors expect and what the products actually deliver?

RW: Well, suppose you decide that you wanted to buy a -2X ETP. What the -2x does is it gives you that return times the daily rate of return. So what you do implicitly when you buy one of these things is you rebalance at the end of each day. Then you get -2x for the next day. So the return I actually get over the month is completely unpredictable. And that value could actually be negative. Is it a good buy-and-hold strategy for an institution? No. Is it a good and effective hedging vehicle for people who might want to hedge? No. Is it going to lose money over time? Yes.

JA: To play devil’s advocate, though, year to date as of yesterday, TVIX [VelocityShares Daily 2x VIX Short Term ETN] was the best-performing U.S.-traded ETP, with a return of 410%. Surely there must be someone out there who benefited from owning that this year, right?