TVIX: Case Study ETNs & ETFs to be Wary Of-

Credit Suisse’s volatility-flavored ETN,  the VelocityShares Daily 2x VIX Short-Term ETN, aka “TVIX” is, for lack of a better phrase, broken.  And it ‘got broken’ in mid Feb when CS halted the creation process for this product.

Observed Chris Hempstead, the head of ETF trading for WallachBeth Capital, “the halt in the creation process caused the product to trade at an unnatural premium–as much as 80%– to the underlying NAV since the creation halt announcement was made.  For more than a month, hedge fund traders have been attempting to arbitrage the dislocation in pricing-and more than a few had based their strategies on the premise the creation process would not be resumed.  ”

Credit Suisse threw a fly into that ointment on Thursday night, when the firm announced it was re-opening the issuance of new units and, as Hempstead pointed out in desk notes to clients of his firm late Thursday night, “you can expect TVIX premiums to NAV to evaporate significantly, if not entirely when trading re-opens.”

Are there other products that display the same  unusual premium to NAV ‘features’?. Hempstead suggests that hedge fund traders who are dabbling in volatility-flavored products should take a second look at Market Vectors China ETF (PEK)  as well as ProShares Trust Ultra VIX Short:  UVXY

Barron’s Brendan Conway offers one of the better “look-backs” at what transpired in TVIX in his mid-day Friday blog posting.  Hempstead’s notes are a great read for any sophisticated hedge fund trader: