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Our experts have published extensively in peer-reviewed journals. Pre-publication versions of these papers plus other working papers are available below.

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Regulation D Offerings: Issuers, Investors, and Intermediaries

The Reg D offering market is similar to the public offering market in terms of total amount of capital raised and has been growing rapidly over recent years. The proceeds sold through Reg D offerings between 2021 and 2022 equal $4.4 trillion, 13% more than the public offering proceeds during the same period and a 46% increase over the Reg D offering proceeds during 2019-2020. Reg D securities have been sold to increasingly more investors per offering with less amount sold to each investor over the past decade, suggesting an increasing participation in unregistered offerings by retail investors. Broker-dealers and registered investment advisers (RIA) play an important role in reaching retail investors: Offerings sold by broker-dealers with a larger retail clientele and offerings sponsored by RIAs with more highnet- worth individual clients are sold to more investors and raise less capital from each investor. Investors must be wary of potential misconduct and conflicts of interest when hiring intermediaries for investments in unregistered securities. Broker-dealers receiving a higher rate of sales commissions and those specializing in Reg D offerings tend to receive more customer complaints arising from unregistered securities. RIAs advising non-fund clients are more likely to disclose a conflict of interest in regulatory filings when they sponsor Reg D offerings, indicating that these advisers invest their own clients' funds in self-sponsored unregistered securities.

What is a TIC Worth?

Published in the PIABA Bar Journal, 19 (3): 373-392, 2012.

Tenants-in-common interests are passive real estate investments which are sold based on two claimed benefits: stable "cash on cash" returns and deferral of capital gains tax through 1031 exchanges. The "cash on cash" returns are found in financial projections in TIC offering documents. Using a stylized TIC cash flow projection based on our review of these materials, we show that TICs use aggressive assumptions to inflate the apparent returns to investors.

Projected cash flows must be discounted to determine whether a TIC investment is reasonably priced or not. A TIC's projected cash flows should be subject to sensitivity analysis to determine the risk of unrealistic projections. This traditional risk-return analysis, as part of a reasonable basis suitability analysis, would have determined that TICs had expected returns which were insufficient to compensate for the risk of their leveraged investments in undiversified real estate and that the claimed tax deferral benefits were small compared to the mispricing in TIC offerings.

Are VIX Futures ETPs Effective Hedges?

Published in The Journal of Index Investing, Winter 2012, Vol. 3, No. 3, pp. 35-48.

Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.

In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.

We also study the effectiveness of VIX ETPs in hedging Leveraged ETFs (LETFs) in which rebalancing effects lead to significant losses for buy-and-hold investors during periods of high volatility. We find that VIX futures ETPs are usually not effective hedges for LETFs.

Isolating the Effect of Day-Count Conventions

Day-count conventions are a ubiquitous but often overlooked aspect of interest-bearing investments. While many market traded securities have adopted fixed or standard conventions, over-the-counter agreements such as interest rate swaps can and do use a wide variety of conventions, and many investors may not be aware of the effects of this choice on their future cash flows. Here, we show that the choice of day-count convention can have a surprisingly large effect on the market value of swap agreements. We highlight the importance of matching day-count conventions on obligations and accompanying swap agreements, and demonstrate various factors which influence the magnitude of day-count convention effects. As interest rate swaps are very common amongst municipal and other institutional investors, we urge investors to thoroughly understand these and other `fine print' terms in any potential agreements. In particular, we highlight the ability of financial intermediaries to effectively increase their fees substantially through their choice of day-count conventions.

A Primer on Non-Traded REITs and other Alternative Real Estate Investments

Published in the Alternative Investment Analyst Review, 2014.

In this paper we provide a brief overview of the ways to achieve real estate exposure and focus our analysis on alternative real estate investments. The term alternative real estate investment, as used in this paper, refers to real estate securities such as non-traded Real Estate Investment Trusts (REITs), private REITs, and Tenants-in-Common (TICs), which are often sold to but may be unsuitable for most retail investors. Some common problems of alternative real estate investments are: 1) their illiquid nature allows them to give investors an illusory sense of low price volatility, 2) their high fees and significant conflicts of interests may lead to a loss of shareholder value, and 3) their reliance on leverage to fund current dividend payments may hide their inability to pay future dividends. Limitations on publicly-available data oblige us to concentrate much of our discussion on non-traded REITs. Our analysis is relevant for the even less transparent private placement REIT and TIC market.

CLOs, Warehousing, and Banc of America's Undisclosed Losses

Collateralized Loan Obligations (CLOs) are issued by trusts which in turn invest the proceeds from issuing the CLO securities in portfolios of bank loans. This note explains the conflicts of interest created when an investment bank accumulates loans for potential securitization prior to the issuance of a CLO through a practice known as 'warehousing.' Warehousing appears to have resulted in some CLO trusts issuing securities without disclosing to investors that the securities had lost almost all their value because the CLO trust was committed to paying substantially more than the market value of the warehoused loans.

We provide two examples of such problematic CLO offerings in which Banc of America appears to have transferred at least $35 million of losses to investors in July 2007 and which ultimately led to approximately $150 million in losses in just these two CLOs. $35 million of those $150 million in losses occurred before Banc of America sold the securities to investors and only $115 million occurred after investors bought the CLO securities. The problem we identify is more widespread than Banc of America and broader than CLOs.

The Private Placement Memoranda for the products mentioned in the paper:
- Bryn Mawr II PPM
- LCM VII PPM
- Symphony IV PPM

The LCM VII Marketing Deck and the LCM Trustee Reports which document the decline in the value of the LCM VII loans before July 31, 2007 are available to read.

News Article:
- American Banker - B of A Subpoenaed by Massachusetts Over CLOs by Allison Bisbey
- The New York Times, February 5, 2012 - A Wipeout That Didn't Have to Happen

Recent Award:
- Hayes v Banc of America Securities - $1.4 million CLO Award

The Properties of Short Term Investing in Leveraged ETFs

Published in the Journal of Financial Transformation, Fall 2012, Journal 35.

The daily returns on leveraged and inverse-leveraged exchange-traded funds (LETFs) are a multiple of the daily returns of a reference index. Because LETFs rebalance their leverage daily, their holding period returns can deviate substantially from the returns of a leveraged investment. While about half of LETF investors hold their investments for less than a month, the standard analysis of these investments uses a continuous time framework that is not appropriate for analyzing short holding periods, so the true effect of this daily rebalancing has not been properly ascertained.

In this paper, we model tracking errors of LETFs compared to a leveraged investment in discrete time. For a period lasting a month or less, the continuous time model predicts tracking errors to be small. However, we find that in a discrete time model, daily portfolio rebalancing introduces tracking errors that are not captured in the continuous time framework. On average, portfolio rebalancing accounts for approximately 25% of the total tracking error, and in certain scenarios the rebalancing tracking error could rise to as high as 5% in 3 weeks and can dominate the total tracking error. Since investors in LETFs have short average holding periods and high average turnover ratios, the effects of portfolio rebalancing must be accurately accounted for in the analysis of LETF returns.

The VXX ETN and Volatility Exposure

Published in the PIABA Bar Journal, Vol. 18, No. 24, pp. 235-252.

Exposure to the CBOE Volatility Index (VIX) has been available since 2004 in the form of futures and since 2006 in the form of options, but recently new exchange-traded products have offered retail investors an easier way to gain exposure to this popular measure of market sentiment. The most successful of these products so far has been Barclays's VXX ETN, which has grown to a market cap of just under $1.5 billion. However, the VXX ETN has lost more than 90% of its value since its introduction in 2009, compared to a decline of only 60% for the VIX index. This poor relative performance is because the VXX ETN tracks an index of VIX futures contracts that can incur negative roll yield. In this paper we review the VIX index and assess the opportunities and risks associated with investing in the VXX ETN.

Futures-Based Commodities ETFs

Published in The Journal of Index Investing, Summer 2011, Vol. 2, No. 1: pp. 14-24.

Commodities Exchange Traded Funds (ETFs) have become popular investments since first introduced in 2004. These funds offer investors a simple way to gain exposure to commodities, which are thought of as an asset class suitable for diversification in investment portfolios and as a hedge against economic downturns. However, returns of futures-based commodities ETFs have deviated significantly from the changes in the prices of their underlying commodities. The pervasive underperformance of futures-based commodities ETFs compared to changes in commodity prices calls into question the usefulness of these ETFs for diversification or hedging.

This paper examines the sources of the deviation between futures-based commodities ETF returns and the changes in commodity prices using crude oil ETFs. We show that the deviation in returns is serially correlated and that a significant portion of this deviation can be predicted by the term structure of the oil futures market. We conclude that only investors sophisticated enough to understand and actively monitor commodities futures market conditions should use these ETFs.

Leveraged Municipal Bond Arbitrage: What Went Wrong?

Published in The Journal of Alternative Investments, Spring 2012, Vol. 14, No. 4: pp. 69-78.

In this article, we explain that, while marketed as an arbitrage strategy, the leveraged municipal bond strategy was simply an opaque high-cost, highly leveraged bet on the value of call options, interest rates and liquidity and credit risk. Brokerage firms misrepresented the strategy by comparing the yields on callable municipal bonds with the yields on non-callable Treasury securities without adjusting the yields on municipal bonds for their embedded call features and by ignoring 30 years of published literature which demonstrates the remaining difference in after-tax yields is compensation for liquidity and credit risk. We also show that much of the losses suffered by investors were suffered during a period of relatively routine interest rates and not during an unprecedented interest rate environment.

Related Awards:
- Puglisi v Citigroup - $750,000 MAT Five Award
- Young v Deutsche Park Securities - $1 million Aravali Fund Award
- Hosier et al v Citigroup - $54.1 million MAT Finance, MAT Two, MAT Three, MAT Five Award
- Coleman v Citigroup - $230,667 ASTA Five Award
- Beard v Citigroup - $336,000 ASTA Five Award
- Barnett et al v Citigroup - $2,428,000 MAT Five Award

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