March 3, 2020
To whom it may concern:
I am writing regarding the proposed rule #S7-24-15 which would place greater constraints on the use of leveraged and inverse funds.
While I personally do not use inverse funds, I have used leveraged funds since 2016 and consider them an integral and crucial part of my portfolio construction process. I am well aware of the risks of these funds, including the fact that they are reset daily and can result in losses even if the underlying non-leveraged index is flat or even up in some circumstances. I monitor these investments daily. I feel that brokerages, instrument providers, and others currently provide ample warning regarding the risks inherent in these products and that their use should not be restricted any further.
One prime consideration is the following: what would restricting leveraged funds force users like myself to invest in as alternatives in order to achieve similar ends? The answer is futures and options, but these instruments create significantly more risk for investors. In the case of both futures and options, not only does your investment thesis have to be correct, but your timing must be perfect as well. In the case of options, if your thesis is correct but your timing is wrong, your option will expire worthless, causing a 100% loss of your investment. As for futures, because you are forced to operate on margin, if the market moves against you, your entire position can easily be wiped out, regardless if a later recovery would have meant your investment thesis was actually correct.
Leveraged funds remove the problem of timing and therefore, when used carefully and prudently, provide the most effective method for achieving leverage for specific investment objectives.
I understand that part of the proposed rule regards whether prior use of leveraged or inverse funds would automatically qualify investors to continue trading leveraged and inverse funds. I believe it would be reasonable to allow prior users to continue their use of these products. More broadly, however, I believe that there should be no new restrictions beyond current requirements.
Thank you for your time and consideration.
Sincerely,
Dirk Hobman