Banks sold more than $6 billion of reverse convertible notes last year, promising income investors returns of up to 64 percent in this historically low interest rate environment; however, reverse convertibles lost money, on average, according to a recent InvestmentNews articles entitled “Hot new asset class has ‘failed on all counts.'” In fact, reverse convertibles contain an often-hidden trap door called a put option, which can end up costing unsuspecting investors dearly.
According to Bloomberg, 1,481 reverse convertibles sold in the U.S. last year lost an average of 1 percent, compared with the Standard & Poor’s 500 stock index that returned 8 percent, and corporate bonds that gained 11.1 percent, during the same period.