UBS “YES” Losses Were Caused by Equity Market Exposure

By Craig McCann, Regina Meng and Edward O'Neal

As of October 2, 2019, there were 48 FINRA arbitration claims filed against UBS over the YES strategy reflected on 50 UBS brokers’ BrokerCheck reports.

In "UBS’s Yield Enhancement Strategy (“YES”) Returns - and then the Losses – Were Caused by Equity Market Exposure" we explain the option basics necessary to understand the YES strategy and illustrate how UBS actually implemented the strategy with predictably disastrous results. They also present how UBS described the strategy in its marketing materials. You can download our working paper by clicking here.

The most recent inductee into the Hall of Fame for portfolio managers who claim to have found the secret sauce to a market-neutral strategy which could generate steady returns but was felled by modest market movements is UBS’s Yield Enhancement Strategy (“YES”) Team.[1]

The YES Team moved from Credit Suisse to UBS in early 2016. The UBS marketing materials in 2016 and 2017 claim YES was market-neutral and had generated monthly returns for 12 years that had been uncorrelated with the stock and bond markets. As you will see below, either the prior returns reported by UBS were false or the strategy implemented at UBS in 2016, 2017 and 2018 differed markedly from what had been implemented previously at Credit Suisse.

UBS claimed that the YES strategy involved selling out of the money put and call options and buying the same number of further out of the money put and call options on the same S&P Index with the same expiration. The combination of four options is sometimes referred to as an “Iron Condor”.

UBS claimed YES’s returns were generated by “time decay” in option values and from the difference between implied volatility and realized volatility independent of the direction of the market. Sounds sophisticated but UBS was effectively claiming to arbitrage systematic mispricing in the market for short term S&P500 Index options – a fool’s errand if there ever was one. In fact, YES was an old-fashioned actively-managed stock portfolio constructed through actively trading equity index options.

UBS accounts subjected to YES treatment suffered losses of 12% to 14% in December 2018 when the S&P 500 dropped 9.2% because the overlay was more than 100% invested in the stock market rather than market neutral as marketed by UBS.

As of October 2, 2019, there were 48 FINRA arbitration claims filed against UBS reflected on 50 UBS brokers’ BrokerCheck reports.

[1] A virtually identical strategy was sold by Merrill Lynch under the brand name Collateral Yield Enhancement Strategy or CYES.