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Robert E. Whaley, credited as the father of the "fear index," unloaded on exchange-traded funds and notes built around the index on Thursday, saying he was "shocked" and "appalled" at the makers of the products and at index maker S&P Dow Jones Indices.

Whaley, who recently signed on as a partner in startup AccuShares Investment Management, which plans its own volatility ETF, singled out the instruments' high carry costs and complex construction as dangers to the individual investor. He said he discovered the danger himself in early 2010 when he bought shares of iPath S&P 500 VIX Short-Term Futures ETN (VXX), an exchange-traded note which holds volatility futures contracts, for his own account.

"I was shocked," Whaley said on the sidelines of ETF.com's Global Macro ETF Strategist Conference in New York. "I bought VXX as a play on volatility. But a week went by, two weeks, and the price went down," he said, even as the CBOE Volatility Index gained in price.

After some prospectus digging, Whaley says he discovered the features this blog has covered extensively which make the ETN unsuitable as a buy-and-hold investment: High carry costs cause the price to fall steadily in most market environments, such that it is down more than 99% since its 2009 inception. "Buying this is about the dumbest thing you could do," he said.

This blog calculated in February that the ETN, which today holds $1.2 billion, has erased more than $5 billion in value since its 2009 launch. None of it much matters to the ETN's key clientele, who are short-term traders and quants. The ETN sees more than 32 million shares change hands daily, XTF.com data show.

The comments begs a contentious question: Can fundmakers and their partners be criticized for catering to fast-moving traders and Wall Street firms with a product that is also available to, but unsuitable for, buy-and-hold investors?

Whaley's answer is yes. "I was appalled to find that no one was acting on behalf of retail customers," he said. He specifically laid into S&P Dow Jones for what he suggested was a deceptive act in its index-making activities. The VXX product is built around a benchmark called the S&P 500 VIX Short-Term Futures Index, which tracks a basket of near-term volatility futures contracts. The contracts are tied to the CBOE Volatility Index of which Whaley is credit as the originator. But the prices of the futures behave different than the volatility index, often dramatically.

Whaley said the act of setting the short-term futures index's original value at 100,000 highlights the company's confidence that the index would fall steeply over time. Otherwise, he argued, the index maker wouldn't have set such an elevated value.

"I'm convinced a lot of people did know this," he said.

An S&P Dow Jones Indices spokesman responded with an emailed statement Friday morning defending the index, calling it "robust, transparent and fair." He said the firm was "flattered" at the suggestion the index maker could predict the future of the indexes, but that Whaley is "mistaken." Click here for the complete statement.

But, the spokesman added, on the index's inception, "As to 100,000 as the base – that was done because it was expected that the Index might go down more than up."

Whaley laid into ETF and ETN makers for what he said was only a gradual process of incorporating sufficient warnings into prospectus documents and other literature, and he reserved special thunder for the leveraged VelocityShares Daily 2x VIX Short-Term ETN (TVIX).

That product, which suffered a malfunction in 2012 when issuer Credit Suisse (CS) cut off new share creations, causing erratic price moves for a period of weeks, plunged about 50% in value over two day when the issue was resolved.

"The number of people harmed by TVIX was enormous," Whaley said. "I don't like things that aren't up front."

It's not a new criticism from Whaley, who wrote last year in the Journal of Portfolio Management that the VIX ETPs are "not suitable buy-and-hold investments" and "virtually guaranteed to lose money through time."

What's new in recent months is Whaley's affiliation with a potential competitor as a partner and adviser, and Whaley's potential to benefit from his affiliation with the startup firm.

The firm, AccuShares Investment Management, plans what it calls the AccuShares Spot CBOE VIX Up Shares and AccuShares Spot CBOE VIX Down Shares. The pair of ETFs, the news of which was broken on this blog in March, are envisioned as enabling investors to bet against one another using cash and cash equivalents in a fund whose price is intended to move in close approximation of the CBOE Volatility Index, not the futures indexes. The CBOE Volatility index, which is also called the VIX, is not directly investable.

Judging by regulatory paperwork, which most recently includes a rule-change notice by the Nasdaq in the Federal Register earlier this week, the funds could be launched as soon as this summer. A different take on the "up" and "down" shares was tried several years ago, but MacroShares' oil up-and-down ETFs were forced to liquidate in 2008 after the price of oil soared, crushing the "down" shares.

The AccuShares plan uses a different method entailing a monthly rebalancing process, as well as a procedure for major market moves, which Dave Nadig of ETF.com argues should work better. "It still requires people to learn about and get comfortable with a new structure, but the math works and the structure is sound," Nadig said by email.

On the sidelines of the ETF.com event Thursday, Whaley touted the AccuShares plan. "It's clean [and] the costs will be explicit," he said. "It's better than these other ETPs."

Others among the 20 or so trading tools tied to the volatility futures index and its variants are ProShares Ultra VIX Short-Term Futures ETF (UVXY) and VelocityShares Daily Inverse VIX Short-Term ETN (XIV).

One of the key questions about the AccuShares plan is feasibility. From the prolific writer of the EconomPic blog on Twitter:

and this, from Eli Mintz:

12:00 update: This blog post was updated in paragraph 10 to include a response from an S&P Dow Jones spokesman, as well as trader reaction in paragraph 22.