(Adds details on products, reasoning behind the changes)
By Trevor Hunnicutt
Feb 26 (Reuters) - Two products designed to expose investors to market swings may become less turbulent.
ProShare Capital Management LLC, sponsor of two of the world's largest products betting on the cost of insurance against market swings, is toning down its investment strategy.
The changes to funds tied to Wall Street's "fear gauge," the CBOE Volatility Index, come three weeks after some volatility-linked products sank by more than 90 percent over a day following a market selloff earlier this month.
One of the exchange-traded funds (ETFs) taking losses, $797 million ProShares Short VIX Short-Term Futures ETF, is halving its mandate.
The fund typically profits in stable markets, but can sink when stocks fall. The depths of its losses after equity markets closed on Feb. 5 shocked some investors; others said the risks were disclosed. The market action is now being probed by securities regulators.
SVXY will, from close of business on Tuesday, be designed to go up 1 percent when the index it tracks declines by 2 percent, ProShare said. Previously, the ratio was negative one-to-one.
A companion product, $342 million ProShares Ultra VIX Short-Term Futures ETF, will aim to gain 1.5 percent, instead of 2 percent, when the index it tracks increases by 1 percent.
The announced dilutions come three days after another company, REX Shares LLC, tamed its own volatility-linked products. Credit Suisse Group AG earlier this month withdrew its VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note, which followed a similar strategy, from the market.
The changes respond to concerns that these volatility products' hunger for VIX futures exhausted the market's liquidity on Feb. 5, pushing prices up and exacerbating losses for traders betting on those contracts falling in value. SVXY sank 83 percent from Feb. 5 to 6, while XIV fell 93 percent.
A ProShare spokesman did not respond to requests for comment on why the changes were made.
The adjustments may not be voluntary. In addition to the attention of regulators, ProShare faces pressure from the major banks that act as its brokers.
Those brokers slashed the amount of futures the funds could obtain from them and also hiked the deposits the funds had to pay in order to buy futures, ProShare disclosed in an offering document filed earlier this month with the U.S. Securities and Exchange Commission, saying the changes could make it more difficult for the funds to operate. (Reporting by Trevor Hunnicutt; Additional reporting by Kanishka Singh; Editing by Sunil Nair)