When it comes to some popular investment products, people who compare Wall Street to a casino may not be too far off the mark. This according to a recent article in The Wall Street Journal.
The article cites the example of one fund (Direxion Daily Financial Bear 3X Shares Fund), which “produces three times the inverse of an index of financial companies” and which posted strong gains during the financial crisis– which then quickly dwindled. According to the article, “The savings-destroying combination of volatility and daily compounding is what makes these leveraged inverse funds losing propositions.” It explains, however, that these funds remain in existence because investors keep channeling in fresh capital in the hopes of “beating the odds.”
Georgetown University finance professor James Angel is quoted, “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.”
With respect to these investment products, Direxion head of capital markets Sylvia Jablonski says, “We consider it a trading tool. We’re very clear with clients that these are products that aren’t meant to be held.”
The article raises the question as to why the SEC allows people with brokerage accounts to “put their nest egg into something that typically loses money,” arguing that “the distinction between an investment and a gamble lies in the odds of success.” Angel sees inverse funds “mostly as gambles,” the article reports, but doesn’t necessarily object to them “since authorities also allow individuals to make even more dangerous bets such as stock options, penny stocks, or for that matter, to play the lottery.”