Martinghoul, would the XIV/SPXY owners have to come out of pocket if XIV/SVXY didn't shut down and VIX futures continued their upward climb? Or whoever hedged the issuer would have to come out of pocket?
Yes, the owners would have needed to pay, I expect. We know that the issuer is not in the business of taking a view on volatility. The issuer's job is to collect their fees, manage the assets, all while being as flat risk as possible at every point in time. So, as I described on another thread, we can be reasonably sure that the issuer has a portfolio whether they're short XIV and short some VIX futures against it. If you're a XIV investor, in theory, you could also have a portfolio where you're perfectly hedged. However, this isn't likely, since the point of being a XIV investor is to have a view on volatility. Therefore, we can be reasonably sure that a typical XIV investor is just long XIV. If XIV didn't have an effective 0 floor, a typical investor's liability would have been unbounded. Obv, this is just my interpretation...