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Abacus vs. 'The Ultras'

Stocks in this article: GS

This post appeared yesterday on RealMoney . Click here for a free trial, and enjoy incisive commentary all day, every day.

Just for giggles, let's compare and contrast "Abacus" and "the Ultras."

Abacus, of course, is the transaction at the center of the SEC's civil complaint with Goldman Sachs (GS); "Ultras" is the catchall phrase associated with all of the double-levered, triple-levered and short-side ETFs.

Both Abacus and Ultras are derivative products, and both utilize swaps.

Abacus was privately marketed solely to sophisticated and qualified institutional investors, who themselves acted as fiduciaries and made their living analyzing, modeling, managing and investing in structured products. Ultras are advertised in the papers, they're available to the general retail public, and you don't need a margin account (a selling point highlighted in their advertising) or special suitability documentation to buy Ultras.

Abacus referenced asset-backed securities and delivered the returns based on the performance of the underlying mortgage pools -- the purchasers understood, and could analyze, the risk they were getting, and they got the risk they sought. Ultras reference stocks and baskets of stocks, yet their performance does not match the performance of those baskets per se -- it is a path-dependent performance and may very well have large tracking errors if used for longer than a one-session holding period (despite the fact that most people do not associate ETFs and mutual funds as intraday holdings). Many Ultra investors have ended up with a much different risk profile than they sought.

In Abacus, the "winner" was a neophyte to the structured products market, the "losers" were dedicated structured products professionals who sat on panels at securitization conferences as experts in their field. In Ultras, the "winners" are those who understand the quirks, the "losers" are those who lack the sophistication to understand those quirks. In fact, there is a built-in "greater fool" premise to the Ultras' very existence -- if used as directed, the companies would have no assets under management.

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