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The stock market’s steady march toward new highs over the past year has proven many market strategists wrong. Now, the bull market is starting to deal the final blow to investment strategies that bet on it. The Simplify Tail Risk ETF, which trades under the cheeky ticker “CYA,” is headed for liquidation later this month after brutal capital losses. The fund, designed to cover investors’ losses when markets decline, has lost more than 99% of its value over the past year. CYA 1Y Mountain Simplify Tail Risk ETF fell due to market rally. A key reason for the dramatic decline, Simplify warns on its website, is that the fund uses up to 20% of its assets to buy options to protect against market declines and volatility, which increases the risk of “tail risk.” ”. Cboe Volatility Index, or “Vix”. As markets have risen with limited volatility over the past year, these options have often expired worthless, prompting funds to deploy even more capital to re-enforce protection. . Michael Green, chief strategist at Simplify, told CNBC that the fund performed as designed but fell victim to changing market conditions and investment sentiment. “The simple reality is that no one likes to include melting ice in their portfolio. … And frankly, in an environment where the market only goes up, things are only going to get 10 times worse,” Green said. Told. “A tail protection product that was highly desired in 2020 currently has no bids. I think that says more about market sentiment than the feasibility of that type of product,” he added. Inflation Hedging Strategies CYA’s spectacular negative returns may be a dramatic example of a downside hedging strategy gone awry, but although it showed short-term promise in the post-pandemic environment, its return has now declined. It’s not the only ETF that investors are pulling out because of below-par prices. Outside. Anti-inflation funds have also been hit. The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL), for example, is down 3.4% over the past 12 months and has seen year-to-date outflows of $34 million, according to FactSet. Inflation-focused equity funds such as AXS Astoria Inflation-Sensitive ETF (PPI) and Fidelity Stock for Inflation (FCPI) have attracted investors this year after underperforming the S&P 500 over the past 12 months. Demand from the market is sluggish. Brian Armour, director of passive strategies research for the North at Morningstar, said while investors will naturally look for ways to protect against a significant market decline when fear mounts, it’s important for fund issuers and their prospective clients to stated that it is best if the fund is easy to understand. America. “I definitely say simpler is better. Understand the potential outcomes. If you’re losing money and it’s a tail risk ETF that buys puts, do that.” [option]Hedging Volatility Then there’s the issue of using volatility indexes to protect against market declines, as CYA has done. Philip Toews of Toews Asset Management said downside protection remains useful. “Another reality we’ve seen over the past few years is that the Vix has been slow compared to what has historically happened in bear markets, especially in 2022. Not only are the costs very high, but you don’t have the protection you’d expect if the market goes down,” Toews said. Tooze’s theory is that downside protection strategies need to be actively managed to respond to changes in risk. His company offers his multi-asset Toews Agility Shares Maned Risk ETF (MRSK), for which he has generated $79 million in revenue over the past year, yet his total assets are only $131 million. It is a relatively small fund at 1 million dollars. Annual sales are approximately 15% and net expense ratio is 0.95%. Indeed, there are some hedging products, such as buffer funds, that continue to draw in assets even during market upturns. The growing popularity of private credit is also an example of investors looking for ways to reduce the overall volatility of their assets. Armer said there is still room for well-designed downside protection strategies, as long as investors understand that they are like insurance that pays off when markets decline. . “Tail risk ETFs can go on for 10 years or more without working, and that’s OK because it’s only supposed to work that one time it actually happened, but you can’t lose your entire investment along the way. I can’t,’” Armor said.
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