If oil prices keep rising, one of the most innovative, if vexing, set of exchange-traded portfolios may bite the dust.
The MacroShares Tradeable Shares oil funds (Amex: UCR and Amex: DCR) have had a rough go of it since their launch in November 2006. Both portfolios were designed to track variations in the price of oil futures: UCR (the "Up" portfolio) was supposed to rise with higher oil prices, while the objective of DCR (the "Down" fund) was appreciation in the event of oil falling.
The funds did just that, but not to the degree investors may have anticipated (see "Holy Macro!"): Premia and discounts were much more significant and persistent with MacroShares than those of other oil-tracking ETFs. And no wonder. Macros are vastly different. For one thing, they're created and redeemed in pairs, so there's always an equal number of shares of UCR and DCR fighting for a share of an asset pool. Investors, too, flocked to UCR and shunned DCR, creating hedging nightmares for market makers. To make matters worse, the underlying portfolios aren't transparently constructed of oil futures, physical oil or oil stocks. The trusts backing up DCR and UCR are instead stuffed with Treasury securities and short-term notes known as repurchase and reverse repurchase agreements.
As one portfolio-say, UCR-rises in value, its appreciation is financed by a shift of assets from the trust backing the complementary portfolio-DCR. Not surprisingly, UCR's net asset value has been rising at the expense of DCR's for several months as oil prices have veered northward.
Since the DCR trust has finite assets, this can continue for only so long. That's why MacroShares could soon warble their swan song.
The MacroShares prospectus calls for early redemption of MacroShares if certain "termination triggers" are hit. One such event would be if the benchmark crude oil price (essentially, NYMEX spot crude futures), settles at or above $111 per barrel for three consecutive trading days. At that point, the value of the DCR trust would be 15% or less of total assets held on deposit, a level that the creator of the portfolios might have thought to represent "deep doo-doo."
Well, folks, April NYMEX crude settled close to the "doo-doo" threshold at $110.21 on Friday. I hear the faint strains of a swan song intro. Indeed, the vexation may soon be over. MacroShares may be slipping away.
More to Come: A closeer look a MacroShares premia and discounts.