There was a very clever hack that econ professor Robert Shiller (of housing-market fame) came up with to avoid having to deal with secondary markets like futures trading.
It goes like this: there are a pair of ETFs, with equal amounts of outstanding shares. Each share in an ETF represents one portion of a claim on $120 (for example). But the exact amount that each of the two is entitled to seesaws based on some external variable, such as the future market for crude oil. So if a barrel of crude is priced at $40, one fund (the "up" ETF) will be valued at $40 per share and its paired fund (the "down" ETF) will be valued at $80 a share. The shares come into existence in pairs and can only be redeemed at the end of the fund's lifetime.
As you can see, this offers a nice solution to the horrendous problems seen in the article. However, when this idea was actually turned into a real product (MacroShares), it ran into real-world problems again and again.
Their first oil funds had to be closed early because it was actually based on that $120 figure -- and when the price of oil shot up close to that level, it triggered an automatic termination. And when they got their $200-a-barrel-max follow-on running, it had lost a lot of the momentum of the earlier funds.
But their major problem was that their complexity was all in full view of the traders, and people found it hard to really understand. Because even though its current asset value was based on the price of oil on a commodity exchange, the "up" version often had a very large premium over that price (and the "down" ETF a discount). That was the effect of contango -- people were figuring in the rising future value of the oil. So in fact, it was actually providing a more accurate price than the commodity market for the storage-free value of a barrel of oil!
Now, that's fascinating and all, but investors wanted a product based on the commodity market value, so it made things annoyingly obscure. Add to that the really complex situation when factoring in the possibility of early termination -- in which case the future price doesn't matter at all because the funds are paid off according to the commodity price at the point of termination -- and things just got to be too much.
MacroShares ended up closing their oil funds in the middle of last year, replacing them with a pair of US city real estate index (yes, the Case-Shiller index) ETFs which seemed interesting but were wildly unpopular. It looks pretty bad for the concept right now, but they are probably just waiting in the wings for the next opportunity since they can provide a way to invest in things that otherwise would never be feasible.
It goes like this: there are a pair of ETFs, with equal amounts of outstanding shares. Each share in an ETF represents one portion of a claim on $120 (for example). But the exact amount that each of the two is entitled to seesaws based on some external variable, such as the future market for crude oil. So if a barrel of crude is priced at $40, one fund (the "up" ETF) will be valued at $40 per share and its paired fund (the "down" ETF) will be valued at $80 a share. The shares come into existence in pairs and can only be redeemed at the end of the fund's lifetime.
As you can see, this offers a nice solution to the horrendous problems seen in the article. However, when this idea was actually turned into a real product (MacroShares), it ran into real-world problems again and again.
Their first oil funds had to be closed early because it was actually based on that $120 figure -- and when the price of oil shot up close to that level, it triggered an automatic termination. And when they got their $200-a-barrel-max follow-on running, it had lost a lot of the momentum of the earlier funds.
But their major problem was that their complexity was all in full view of the traders, and people found it hard to really understand. Because even though its current asset value was based on the price of oil on a commodity exchange, the "up" version often had a very large premium over that price (and the "down" ETF a discount). That was the effect of contango -- people were figuring in the rising future value of the oil. So in fact, it was actually providing a more accurate price than the commodity market for the storage-free value of a barrel of oil!
Now, that's fascinating and all, but investors wanted a product based on the commodity market value, so it made things annoyingly obscure. Add to that the really complex situation when factoring in the possibility of early termination -- in which case the future price doesn't matter at all because the funds are paid off according to the commodity price at the point of termination -- and things just got to be too much.
MacroShares ended up closing their oil funds in the middle of last year, replacing them with a pair of US city real estate index (yes, the Case-Shiller index) ETFs which seemed interesting but were wildly unpopular. It looks pretty bad for the concept right now, but they are probably just waiting in the wings for the next opportunity since they can provide a way to invest in things that otherwise would never be feasible.