Thursday, December 8, 2011

Update on the Fisher/Gartman Volatility ETN's (ONN; OFF)

Following up on last week's "Fisher/Gartman Introduce Volatility ETN's; Short 'em Both (ONN; OFF)".
From Schaeffer's Outside the Box blog:
Risk ONN, Risk OFF
So I'm scanning for no apparent reason, and the header "Fisher, Gartman: New Way to Bet on Volatility" catches my eye:
"Commodities traders Mark Fisher and CNBC contributor Dennis Gartman launched two exchange-traded notes (ETNs) on Wednesday that allow retail investors make quick wagers on the risk sentiment in the marketplace. The securities -- one for 'risk on' and one for 'risk off' -- are a bet by the two veteran traders that global markets will continue to be subject to extreme day-to-day volatility."
I always say, there are two things the world needs more of: Volatility-based ETNs, and the words "risk on" and "risk off."

OK, maybe not.

But upon further inspection, ONN is not really a volatility-wagering ETN. It just buys (and shorts) a motley assortment of assets that we can best describe as "stuff that all moves together on these big up and big down days." Here's a link to the fact sheet if you're curious.

And here's my first question: Why? (I mean, other than to generate fees.)

There are two funds here. One, with the symbol ONN, is designed to rally when someone on TV yells "Risk on!" According to the fact sheet, it goes 150% long all the fun assets that go up when the market goes up -- such as stocks, and commodities, and currencies like the Australian dollar -- and 50% short all of those safety plays, including bonds and the yen. And, best I can gather, OFF does the reverse.
I'm not entirely sure how this bets on volatility. The structure seems to give it somewhere between 1x and 2x leverage, depending on how their chosen asset mix actually correlates to the market.

Which leads to my more salient question: What happens if parts, or all, of this whole grand macro trade, decouples over time? We're at historically high correlation right now, both within the stock market and among all sorts of asset classes. Suppose that breaks? You're basically left with a diversified asset mix that may or may not move with the market. Which is fine, except that it's named for and billed as the vehicle to trade this whole overused "risk on/risk off" mantra. So, these products are basically going to track a concept that may or may not exist....MORE
Here's Mad Hedge Fund Trader via Resource Investor:

Watch Out for the New “Risk On” ETN
Mark Fisher of MBF Asset Management and Dennis Gartman of the eponymous Gartman Letter joined forces Wednesday to launch a new exchange traded note, or ETN (ONN), that promises to capture the “Risk On” trade. The instrument is designed as an improvement over the old Volatility Index ETF where traders attempted to capture short term market swings.

The note has the following makeup:
48% energy
46% equities
30% foreign currencies
18% agricultural commodities
10% metals

36% sovereign bonds
14% foreign currencies
While the first day trading volume was large and the timing propitious, with the Dow up 300 points at the opening, the note presents several risks. The exact definition of “Risk Off” evolves by the day, and the quarterly resets and rebalancing’s may not be frequent enough to catch the changes. This is why the fund sponsors kept gold out of the mix, which morphed from a “Risk Off” asset in the first half into a solidly “Risk On” one in the second half, and could well change gender once more.

There is also the problem of rolls, backwardations, and contangos, which have long bedeviled ETF’s in the commodities area, such as with the one for oil (USO) and natural gas (UNG). Tracking error can be problematic for these kinds of funds, which offer carry hefty management and administration fees. This could attract opportunistic hedge funds which are already coining it shooting against existing commodity and leveraged ETF’s....MORE