Caveat Emptor: Structured Retail Investment Products

by: Mark Hines

With the whirlwind of new structured retail investment products being introduced everyday (e.g. Ultra ProFunds, UltraShort PowerShares), it seems only inevitable that something is eventually going to blow up. For example, when MacroShares created its "Oil Up" and "Oil Down" (UCR) and (DCR) tradable shares back in 2006, I'm sure they thought it very unlikely that crude oil would be trading over $126 per barrel. And unfortunately for some unsuspecting investors, that unlikelihood may prove to be quite painful.

According to MacroShares, UCR and DCR "allow investors the ability to take a long [or short] position based on their view of... futures contracts of a barrel of crude oil." Interestingly, UCR and DCR contain a termination clause whereby the shares are liquidated if crude oil trades above $111 for three consecutive days (which it did for the first time back on April 16th). What's further, the last day of trading for the shares is now set for June 25, 2008, and if crude oil trades above approximately $120 per barrel on that date, then the "Oil Down" shares (DCR) will expire worthless (for reference, DCR currently trades around $2 per share).

Considering oil is trading over $126 per barrel, it seems increasingly likely that DCR shares will be completely worthless when they expire on June 25, 2008. This creates an interesting short sale opportunity for some investors, but it will also likely cause some serious pain for a few unsuspecting buyers. Further, I suspect we'll begin to see more serious problems with structured retail products in the future as they continue to get more complex and harder to understand. Caveat Emptor.