Leverage Decay Within Ultra ETFS/ETNS

People have asked me the following questions:

Why the vicious drops in 2x/3x leveraged short ETFS/ETNS?
Why have the 2x/3x leveraged long vehicles not rallied as much?

The Answer is Three Part:

PART 1 - Leverage Decay-

These Exchange Traded Notes/Funds are levered vehicles, which itself is extremely risky. Have we not figured out that leveraging something that we don't understand is a dangerous thing? Also within the leverage is massive risk modeling via quantitative measures, again...we know what this entails. These trading vehicles only perform the way they do when markets are extremely volatile. When markets are volatile (Dropping) people tend to pay more for portfolio insurance, most favorably put options. Put premiums are priced off of many things, most importantly implied volatility. When the whole world is going to hell, we need insurance correct? But going back to volatility which is generally based off of the CBOE VIX/VXN, people tend to look at higher VIX/VXN prices when markets take a tumble, consequently when markets rally, the VIX/VXN falls as people are not to worried about FEAR, because GREED is dominating. The best place to be when markets get hammered is obviously the short side, but remember when buying these vehicles that a corresponding spike in the VIX or implied volatility is needed, and even then they might drastically underperform because over time we have leverage decay.
On the other hand, you don't want to be in these leveraged short vehicles when markets rally, as they get totally blasted.

PART 2 - Total Return Swap-

When we speak about 2x/3x leveraged vehicles, are we talking about a fund that shorts 2x/3x the amount of stock the corresponding long vehicle owns? Of course not, remember to properly get short, one must actually borrow stock, then short it. Many times stock is just not borrowable, so how does this work? All of these funds/notes get involved in something called a Total Return Swap that will emulate 2x/3x virtual/synthetic short exposure. Swap prices are based on what the market thinks volatility and our interest rates are headed in the future, thus when markets drop or rally precipitously the market has a notion on what type of premium should be allocated to swap prices. Higher Swap Prices generally favor people on the short side of the market because they inherently have higher premiums and or volatility attached to them. When markets rally after a severe drop, you will notice not only leverage decay but sharply lower swap rates/prices/yields as investors tend to unwind their negative exposure.

PART 3 - Supply/Demand Dynamics-

As we know, these vehicles are traded on an exchange where there are buyers and sellers, thus they get pushed around quite furiously mostly around the close.

I don't know why people trade these, other then fear and greed obviously, but they were created only to make Investment Bankers and Structured Finance Traders very rich, as the expense structure is higher then normal ETFS.