MacroShares Goes Bust: Will They Be Back?

by on June 26, 2009 | ETFs Mentioned:

Thursday marked the last day of trading for MacroShares $100 Oil Up (UOY) and $100 Oil Down (DOY), two securities that drew a lot of attention from the ETF community (even though they’re not technically ETFs), but were slow to catch on with investors. The development comes as no surprise, as MacroShares reported back in May that it intended to close the funds due to the failure to attract $50 million in assets. Following the early termination of the funds, which were actually the reincarnation of an original pair of funds that collapsed when oil prices jumped dramatically in 2008, it’s possible that MacroShares will soon be back, selling a similar story with a different cast of characters.

Take Two

The Oil Up and Oil Down funds were based on a unique premise. The funds, which were created in equal amounts, were actually invested in short-term Treasury Bills, but sought to track the price movements of crude oil. UOY and DOY entered into a binding agreement to pledge assets to one another over time, in accordance with a set of predetermined rules. Specifically, for every $16 increase in the price of crude oil, DOY agreed to transfer $1 per share to UOY, and vice versa (the shares began with an original value of $6.25 each). Upon the expiration of the funds (originally set for December 2013), investors were to be paid out based on prices in effect at that time. Now, investors in DOY and UOY will receive a cash payment in early July based on the values of the funds, which in turn depends upon Wednesday’s closing price of the August NYMEX light sweet crude oil futures contract.

MacroShares launched a similar pair of funds in 2008, but oil prices skyrocketed, resulting in the net asset value of the down fund reaching zero and triggering the termination of the funds. The second version of the paired funds “solved” this problem by basing the starting value on $100 oil. But the fine print also allowed for the termination of the funds if total assets failed to reach $50 million. While an interesting concept, it appears that the MarcoShares funds were done in by a number of factors, including significant disconnects between their market prices and underlying asset values.

Take Three?

Just before electing to terminate its oil funds, MacroShares filed to launch another set of paired funds operating in a similar manner to DOY and UOY, but focusing on the real estate market. The proposed exchange-traded securities (again, they’re technically not ETFs), the MacroShares Major Metro Housing Down (DMM) and Major Metro Housing Up (UMM) funds, purport to track the percentage change in U.S. single-family home prices, as measured by the S&P Case-Schiller Composite-10 Home Price Index. But there’s a twist. The amounts pledged between the funds would be equal to 300% of the change in the underlying index. For example if the index had risen 2% at maturity, DMM would transfer 6% of its starting value to UMM. Similar to the oil up and down funds, UMM and DMM have a set maturity date, in this case November 2014.

In late May, an IPO for the new funds failed, sending the MacroShares team back to the drawing board. Although indications were that issuer would pursue a more traditional fund launch, we’re yet to see any new developments.

Disclosure: No positions at time of writing.