Thu, December 24, 2009
No Huge Surprise: MacroShares UMM and DMM Will Terminate Early
This past summer I wrote about the novel Macroshares trusts released this year that enable investors to speculate on the direction of housing prices. Earlier this week, MacroMarkets announced that instead of terminating in 2014, the trusts will terminate next week.
Although the two exchange-traded trusts UMM and DMM are intended to reflect changes in the S&P/Case-Shiller Composite-10 index, their daily price movements do not track the index on a day-to-day or even month-to-month basis. Only at the beginning and termination of the trusts are their prices actually linked directly to the index; at other times, the prices simply move based on investor speculation. For example, although at termination the prices of UMM and DMM are supposed to sum to $50, yesterday UMM closed at $21.21 and DMM closed at $24.90.
As I warned in July, the MacroShares trust prospectuses indicated that there were more than a dozen circumstances that could cause the trusts to terminate early. Among these was a provision for termination when “the amount of cash and treasuries on deposit in the Up Trust and/or Down Trust is less than fifty (50) million dollars per trust on any business day and we elect, in our discretion, to terminate the paired trusts,” and this is the provision that is being invoked.
According to the MacroShares announcement, the two housing-linked trusts will trade on the open markets until December 28th, and on January 6th 2010, shareholders will receive payments based on the November 24, 2009 release of the Case-Shiller index. Early termination expenses for the two trusts are estimated to be on the order of $0.85 to $0.90.
This will be the third pair of MacroShares trusts that has not gone to full completion of its planned term. Although I have a great deal of respect for Yale economist Robert Shiller, who invented the concept for these trusts, I don’t think that all the “bugs” have been worked out of these things yet. My initial assessment of UMM and DMM was that they would not be an effective way for retail investors to hedge their housing price risks over the next five years, and I think that judgment has been vindicated. They were useful for speculation, but not much else.
Disclosure: Invested in DMM.
RELATED POSTS:
MacroShares UMM and DMM Let You Hedge House Prices, But Should You?
Further Criticism of MacroShares UMM and DMM