MacroShares Oil Funds 2.0

by: Index Universe posted on: April 21, 2008 | about stocks: DCR / UCR

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By Matthew Hougan

The MacroShares are dead. Long live the MacroShares!

That's right, Jim Wiandt: The termination trigger is triggered, and the first generation of MacroShares ETFs is going away. The Up Oil Trust (UCR) and Down Oil Trust (DCR) will cease trading on June 25, and liquidate in the following week.

But MacroShares as a company isn't going away. The company considers these oil products a success (with $300 million in assets earning a 1.6% fee, I can see why), and it is issuing a new round of Macros with the start price set at $100/barrel.

The prospectus for the new $100 Down Trust is available here, and the prospectus for the $100 Up Trust is available here.

Will people invest in the new Macros? Who knows. It will be an interesting test case to see whether people really want to hold these products as opposed to the many other crude oil proceeds out there.

For the record, the expense ratio on the new fund appears to be changing. As best as I can tell from the prospectus (which is, as always with MacroShares products, exquisitely complicated), the expense ratio for each trust will be set at 0.95% + a fixed fee of $600,000. I assume that fixed fee will be prorated over the total shares outstanding. So if you get a decent amount of assets in here, you're looking at an expense ratio of about 1%.

The folks at MacroMarkets are also developing a paired trust tied to medical cost inflation, along with (I assume) many other products.

What a weird thing this whole thing, though. One day, MacroShares is plugging along with revenues of $4+ million per year. The next day (or to be more exact, the next week, as the funds aren't liquidated until June 30), zero. All because the price of oil is up.

Shortability

One little fun note: I actually tried to short 500 shares of the Down Macro Trust (DCR) yesterday in my E*Trade account, figuring the fund share price would quickly move closer toward its NAV once the trigger was tripped. No such luck: E*Trade told me that there were no shares available to borrow.

Right now, the share price of DCR is $3.97/share, while the NAV is just $1.95/share. When the funds are liquidated, shareholders will get paid the NAV. So over the next nine trading days, either DCR's share price has to fall, or the NAV has to rise, or some combination thereof.

Someone commented on Seeking Alpha that DCR is acting like a short-term PUT option on crude oil futures, which is an interesting idea. But something tells me that the unavailability of short shares is part of what's driving that $2 (50%) gap between NAV and the price of DCR.

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