Leveraged and inverse funds, like all nearly all investments, are risky. Adequate disclosure of risks should be sufficient for individual investor protection. If regulators do not believe that investors understand the risks from the prospectus, then what does this say about efforts to protect investors in domains beyond these funds? Moreover, what risks are unique to these funds that regulators believe are not well understood by investors despite disclosure (e.g., slippage, liquidation risk)? Restricting access to owning or trading these funds seems shortsighted without a solid understanding of why investors fail to understand the risks or would otherwise be harmed. Education and disclosure are important, and I encourage efforts to continually improve these areas. In contrast, I doubt net worth thresholds or special broker approval achieve a mission of investor protection. Outright ownership restriction strikes me as gatekeeping and potentially prevents investors from achieving their financial goals in accordance with their desired risk profile.
I'm a tenure-track professor at a top-tier business school in the United States. I'm relatively young and use these funds as part of my long-horizon investment strategy. The risks are well understood and can be managed through sound portfolio construction.
Ultimately, I encourage regulators to think deeply about why investor protection fails for leveraged and inverse funds, and whether the proposed rules changes accomplish these objectives. I don't believe all of the proposed rule changes achieved their stated purpose.
John Wertz Comment On Regulatory Notice 22-08
Leveraged and inverse funds, like all nearly all investments, are risky. Adequate disclosure of risks should be sufficient for individual investor protection. If regulators do not believe that investors understand the risks from the prospectus, then what does this say about efforts to protect investors in domains beyond these funds? Moreover, what risks are unique to these funds that regulators believe are not well understood by investors despite disclosure (e.g., slippage, liquidation risk)? Restricting access to owning or trading these funds seems shortsighted without a solid understanding of why investors fail to understand the risks or would otherwise be harmed. Education and disclosure are important, and I encourage efforts to continually improve these areas. In contrast, I doubt net worth thresholds or special broker approval achieve a mission of investor protection. Outright ownership restriction strikes me as gatekeeping and potentially prevents investors from achieving their financial goals in accordance with their desired risk profile.
I'm a tenure-track professor at a top-tier business school in the United States. I'm relatively young and use these funds as part of my long-horizon investment strategy. The risks are well understood and can be managed through sound portfolio construction.
Ultimately, I encourage regulators to think deeply about why investor protection fails for leveraged and inverse funds, and whether the proposed rules changes accomplish these objectives. I don't believe all of the proposed rule changes achieved their stated purpose.