The SEC filing provided significant details as to how YES, which has been shut to new investors since 2018, operated within the UBS stable of offerings.
According to the filing, the YES strategy was developed by a team at Credit Suisse Securities, whom UBS recruited in late 2015 as Credit Suisse was getting out of the advisory business, paying them upfront awards of about $50 million. At the same time, UBS also recruited a number of Credit Suisse financial advisors, and collectively the group brought 300 client accounts with about $1 billion in YES investments.
These clients, the SEC found, were very much aware of the downside risks of YES, which relies on a complicated options strategy known as an “Iron Condor” that generally sells short-term put and call options on the S&P 500 and hedges those positions by purchasing below-markets puts and above-market calls with the same duration.
“Most, if not all, [of these clients] nevertheless continued with the program given its successful track record at Credit Suisse,” the SEC said.
In explaining the investment to new advisors and new clients, the YES team claimed the strategy produced returns of about 3% to 5% a year, with a worst-case historical loss of 1% per year. About 600 new clients invested $2 billion during the UBS YES roll-out, the SEC said, and those new clients produced net profit of $5.8 million out of $9.6 million for the total program during the relevant period.
Internally, however, UBS had a different calculation for downside risk, the SEC said.
“According to UBS’s internal risk reports, YES’s potential maximum losses generally ranged between 10% and 20% during the Relevant Period. The internal risk reports were not shared with financial advisors or clients,” the SEC said. “Certain clients who invested in YES during the Relevant Period would not have invested in YES had they known the significant downside risk, and believed their financial advisors would not have recommended YES had they appreciated those risks.”
Those risks began to materialize in early 2018 as market volatility increased. When the S&P 500 fell 15% between Dec. 2, 2018, and Dec. 25, 2018, and then rallied to finish the month down 11%, the YES strategy suffered a 13% loss for the month and an 18% loss for the year, the SEC said. That’s when the program shut to new investors.
“It’s a pretty unusual thing to for a program to be closed like that,” Apotheker said. “I’ve known of other funds that have shut down and unwound. But this seems like it’s essentially liquidation only, or investors stay pat. I don’t think that the SEC action has affected this. The program was headed down this road anyway.”