A follow-up to volatility hedges

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):

Credit Suisse Plans to Reopen Issuance of VelocityShares Daily 2x Long VIX Short-Term ETN (Ticker Symbol: “TVIX”) on a Limited Basis.

Credit Suisse has filed a registration statement (including a pricing supplement, prospectus supplement and prospectus) with the ETNs and Exchange Commission, or SEC, for the offering of the ETNs. Before you invest, you should read the applicable pricing supplement, the prospectus supplement dated March 25, 2009, and the prospectus dated March 25, 2009 (File No. 333-158199-10), to understand fully the terms of the notes and other considerations that are important in making a decision about investing in the ETNs. You may get these documents without cost by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, Credit Suisse or VLS Securities LLC or any agent or dealer participating in an offering will arrange to send you the applicable terms sheet, relevant product supplement if applicable, prospectus supplement and prospectus if you so request by calling toll-free 1 800-221-1037. Alternatively, a prospectus for the products can be found at http://www.velocityshares.com/
Performance results do not reflect the deduction of fees, expenses, brokerage costs, or other risks or costs, the incurrence of which would have the effect of decreasing historical performance results. It is not possible to make a direct investment in the indices. The performance of the indices is not illustrative of the performance of any security, including ETNs, related to such index.
The ETNs are intended to be trading tools for sophisticated investors and should be purchased only by knowledgeable investors who understand the potential consequences of investing in a commodity index and of seeking inverse or leveraged investment results . This document is being furnished to institutional investors for information purposes only and may not be publicly disseminated. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product. Investors should review the prospectus or offering document for any security, financial instrument or product and make their own investment decisions based on their specific investment objectives and financial position and after consulting independent tax, accounting, legal and financial advisors. The information contained herein (including historical prices or values) has been obtained from sources that VelocityShares LLC and VLS Securities LLC (together, “VelocityShares”) considers to be reliable; however, VelocityShares does not make any representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein.
For VelocityShares ETNs, VelocityShares and/or its affiliates receives compensation from the issuer of the ETNs and/or its affiliates in connection with a marketing program that includes promotion of VelocityShares ETNs. Additional information about the sources, amounts, and terms of compensation is described in the ETNs prospectus and related documents.
“VelocityShares” and the VelocityShares logo are registered trademarks of VelocityShares Index & Calculation Services, a division of VelocityShares, LLC.

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!