The 2008 financial crisis was one of the worst in the history of the United States. The reasons behind it are numerous, and there is still vigorous debate about the role that various policies, financial vehicles, institutions and people played in bringing about the worst financial catastrophe since the Great Depression.
However, everyone who has studied the 2008 debacle almost universally agrees that certain financial instruments and the extremely loose regulations surrounding them were chief culprits. So-called mortgage-backed securities and credit default swaps were key components in the economic bomb that ultimately exploded, nearly bringing down the entire financial edifice of the United States with it.
Shervin Pishevar, one of the most successful entrepreneurs in Silicon Valley, recently unleashed a flurry of tweets on his account, which is followed by nearly 100,000 people. One of the more provocative ideas that Shervin Pishevar put forth was that some of the same dynamics that led to the 2008 crash are now being repeated, and for much the same reasons. Shervin Pishevar believes that volatility indexes and the funds that are centered around them are essentially scams, fueled by the same base motivations that led to the rise of collateralized debt obligations and credit default swaps.
Pishevar says that the real reason behind the huge popularity of volatility indexes, prior to their momentous crash last February, was the simple fact that many fund managers want to create volatility because that is what they are incentivized to do. Pishevar points out that the way that many fund managers are compensated is equivalent to a classical principal-agent scam. The manager wants to create as much volatility as possible because he is able to participate in the upside without personally assuming any of the downside risk. That means that the more frequently the fund registers huge wins, the more the manager will actually be paid over the long term.
Shervin Pishevar strongly warns that all investors should read and understand a fund’s prospectus before investing. In particular, they need to carefully read and, if need be, go over with a professional the compensation structure of the fund, making sure that the management is not incentivized to run very costly scams with the investors’ money.