It’s kind of funny. After today’s TVIX catastrophe which we covered in our last blog post, Credit Suisse decided to take some action. In the original post I didn’t get into the details of why the fund crumbled. In short, it crumbled because Credit Suisse stopped issuing new shares in what is known as “creation units.” The fact that they stopped creating new units set the stage for today’s decline. Since they weren’t issuing new units, everyone who wanted to get long volatility drove the price of TVIX up so high that it was trading at a 40% premium to its net asset value (think finite supply with increasing demand). Today, arbitrage traders sold the **** out of the fund to arb the premium back towards NAV. Credit Suisse, recognizing the problem (after investors had lost millions of dollars), issued the following press release this evening (provided in its entirety to prevent any editorial bias):
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Weeding through the legal jargon, it appears that they intend to start issuing new creation units to pull the ETN’s market value back into line with its NAV. What a novel idea. That’s why they earn their 1.65% management fee!