Get a Grip on Two Sliding Oil Proxies

I believe it's worthwhile to explore and understand new investment products. While I generally believe simpler is better, some complex products will warrant consideration.

This brings the discussion to the new Claymore Macroshares: Macroshares Oil Up(UCR Quote) and Macroshares Oil Down(DCR Quote). Simply stated, Oil Up is meant to capture the move in the price of oil from the listing date (Claymore rounded to $60), meaning you could buy Oil Up to capture a move up in oil prices -- which the product's name seems to imply will be the direction. Oil Down is meant to capture a move down in oil prices; essentially, it's a vehicle for shorting oil.

That seems simple, and it is. But the mechanics and details become progressively more complex. The two funds are tied to together in a way that is, for now, unique. As oil goes up and down in price, assets will move between the two funds to maintain a balance between the prices. The way it was explained to me was that the two prices added together will always equal about $120; comparing net asset values for the two instruments, that estimate was off by 4 cents as of Friday. Take this simplified example: If oil goes to $70, Oil Up will be at $70 and Oil Down will be at $50.

Conceptually, it's as if both funds shared the same asset pool. The price of one goes up at the expense of the other, due to the transfer of assets back and forth between the two funds. In my example above, if oil goes from $60 to $70, $10 will go from Oil Down to Oil Up to maintain the $120 equilibrium.