Did Accushares Create a Product That is Linearizing the VIX Futures Term Structure?

Thursday, May 21st, 2015 | Vance Harwood

Eli Mintz, the publisher of vixcentral.com, has published an analysis that shows the arbitrage relationship between Accushares’ VXUP shares and VIX Futures.  It shows that investors can use VXUP shares to lock in a low risk position for any VIX Future expiration month.

What struck me about this analysis was the incentive to sell VIX futures that had a higher daily roll yield, regardless of what month expiration they are.    This would tend to linearize the term structure of VIX Futures, and with a whopping 3 days of VXUP trading under our belts, this seems to be happening.   Normally I would expect very heavy contango between the first and second month futures as we bump up against all time highs in the S&P, but instead the contango has decreased from last week.


This might just be an effect from the May futures expiration that occurred during this transition, but I think  contango normally stays pretty consistent across expiration boundaries.

It could be that Accushares has unintentionally created a VIX futures term structure linearizer…

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Tracking Information and Status Update on Accushares’ VXUP and VXDN

Wednesday, May 20th, 2015 | Vance Harwood

I’ve taken 20 minute delayed information to calculate tracking information and other items of interest using Google Sheets and Yahoo Finance’s on-line resources.   The day-end NAV values for these funds can be found here and here.

The last two lines in the table above show an experiment in progress.  It’s likely that the VXUP shares will track fairly close to the VIX futures that expires a couple days after VXUP / VXDN’s monthly cycle.  Currently I just multiply the current VIX future value by the Accurshares’ period multiplier factor (shown in the table below) and then apply the daily adjustment factor of 0.15% (only applies when starting VIX is <= 30) to the IV start value.


Status Update  16-June-2015

Nothing like a little real data to shake things up…  With 20 days of operational data to look at we can say some things about AccuShares’ VXUP and VXDN funds:

  1. These funds are NOT behaving the way described in the prospectus, in the marketing materials, and in the interviews provided by the supporters.  Tracking errors have matched what the detractors predicted–horrible.  Day end errors have been more than +-10% several days, and the funds are tracking VIX futures percentage movements rather than the VIX.  In contrast UVXY, an aggressive 2X short term volatility fund has a median tracking error of 0.08%.
  2. However, these funds are not dead in the water.
    • Volumes have been significant, especially VXUP.  One day had volume over 190,000 which is very impressive for a new fund.
    • Outstanding shares have quadrupled to 400K shares for each fund, giving a combined market cap of  $20 million after a week, again very impressive.
    • Bid / Ask spreads for both funds have been good, often dropping below 1%, very acceptable
    • Intraday Indicative Values (IV) are currently being published by Yahoo Finance under ^VXUP-IV and ^VXDN-IV
  3. Some implications of the numbers above:
    • The market makers for these funds were well prepared,  they were not surprised by the tracking error.  This is doubly impressive because of the novel nature of these funds.  VXUP / VXDN come in paired sets from Accushare, which I suspect broke a lot of software.
    • The Authorized Participants, the so called primary market for ETFs, were able to do share creation transactions with Accushares in spite of the wide tracking errors.  They needed to be able to short VXUP/VXDN shares at a combined price that was higher than the combined price of the NAV / IV prices that the funds were supposed to be trading close to.   The APs do risk free arbitrage operations for ETFs by shorting shares if they get too high above the IV values and doing share creations with the issuer (Accushares in this case) at the end of day to close out their short position at a profit.
    • I think both the market makers and the APs are using VIX futures to hedge their positions, otherwise I don’t see any way they would offer the small bid / ask spreads, or be willing to short VXUP/VXDN intraday and then wait for the end of day creation process.
  4. Puzzles and upcoming excitement
    • VXDN volume has been consistently lower than VXUP.  300K VXDN shares have been created since inception, and I’m pretty sure the total buy/sell volume for VXDN has been quite a bit less than that.  The market makers are apparently holding them, and I suspect are loaning them out for short selling.  Are the market makers willing to hold onto (“wear” in their vernacular) an indeterminate number of VXDN shares?
    • In the July 2015 cycle the Corrective Distribution (CD) process (see 11 Things You Should know about VXUP/VXDN) comes into play.  Its intent was to correct slowly accreting tracking errors (I’m guessing), but in actuality it looks like it will generate a truly minding bending challenge for the arbitrageurs that are trading these funds now.   If the the tracking error goes beyond +-10% for 3 consecutive days then a CD will be scheduled for the next distribution.  The CD will change the payout to the detriment of the arbitrageurs.   This creates a Prisoners Dilemma situation where everyone is punished if one trader gets greedy and pushes the fund past a 10% when there have been two consecutive closes with greater than 10%. For more see this post by Jay Wolberg on Trading Volatility.   Who knew how much entertainment value these funds would create!
    • The VIX term structure has been unusually linear since these funds came out.   In particular the price of the 2nd month future appears to have been brought down a bit.   This might cast a little light on what I think is a very murky arbitrage picture between VIX futures and the SPX options that theoretically provide their underpinnings.
  5. As near as I can tell AccuShares itself has gone dark except for accelerating the CD schedule by one month.   I think it’s highly likely that its filings for additional products like VXUP/VXDN will go on indefinite hold.    I’m hoping they will talk to some people that can help them understand what happened and chart a course forward that lets them be successful.  These funds are gathering assets, that is something a lot of startup ETFs have failed to do.


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Eleven Things You Should Know About AccuShares’ New VIX UP and VIX Down

Sunday, May 17th, 2015 | Vance Harwood

AccuShares’ new VX UP and VX Down funds started trading on May 19th.   There is a lot of interest in these Exchange Traded Products (ETPs) because they are the first funds to attempt a direct linkage to the CBOE’s VIX index.  An investable VIX has been the Holy Grail of volatility investment.

Unfortunately after a few weeks of actual trading things do not look promising.  The UP shares are trading way above (10% or more) where the fund’s indicative value (IV) is, and the Down shares are trading way below (10% or more) their IV.   It appears that the scenario pointed out this this comment to the SEC regarding the funds is playing out—arbitrage opportunities with VIX futures are dragging their values away from their intended operating model.   Right now their prices are behaving more like VIX Futures than the VIX index.   If this behavior continues the fund’s performance will not be even close to what the investor is led to expect from the marketing materials and the prospectus.

I have spent some time reviewing the prospectus.  As usual it is a confusing and frustrating exercise.  I don’t know what it is about prospectuses, they seem to give some information eight different times and if you are lucky other apparently critical things are only described once.

AccuShares states that these funds are intended only for sophisticated investors—I can second that.

The items below seemed important to me:

  1. The VIX Up and VIX Down Exchange Traded Notes (tickers VXUP & VXDN) trade in a monthly cycle. The cycle starts on the 16th calendar day of the month if it’s a business day, or the first business day after.
  2. At the end of the monthly cycle the fund with gains distributes a Regular Distribution of a cash dividend or stock grant of equal numbers of VXUP / VXDN shares of equivalent cash value to holders of record. Accushares believes that these distributions will be taxed as qualified dividends (pg 127).  Usual disclaimers about tax advice apply.
  3.  At the beginning of the monthly cycle the value of the two funds is set to the same value—the value of the lower of the two funds at the end of the previous cycle.
  4. The funds are designed to follow the percentage moves of the VIX (or the opposite), not the absolute value of the VIX. There will usually be a 0.15% daily adjustment that will be discussed later.   The theoretical values of the fund’s shares are called the Share Class or the IV values.  The fund’s initial Share Value was $25 per share.
  5. The fund issuer does not make any investments in volatility related securities. All assets are kept in cash or highly secure investments like treasuries or fully collateralized repos.   Earnings from these investments may be distributed as part of the regular monthly distributions.
  6. If the VIX index at the beginning of the period is less than or equal to 30 the Up fund’s value is decreased by 0.15% of the cycle’s beginning Share Class value every calendar day (cumulative 4.6% per month). This factor is derived from the typical losses that long volatility products like near month VIX futures or VXX experience in a typical month of trading (a month with no volatility spikes).   The Down shares are boosted by the same amount.  This tweak is intended to prevent disruptive trading by individuals or institutions using VXDN or VXUP to hedge other volatility investments.   Time will tell how well this works.
  7. The Regular Distributions at the end of the period are a bit tricky.  The winning fund will do a dividend distribution that will take its Share Class value down to the losing fund’s value.   The income from that dividend distribution will be partially offset by the capital loss from the winning shares’ value dropping all the way to the losing share’s value.  For example, at the beginning of a period let’s assume the VIX is at 40, and the VXDN/VXUP shares are worth $10, if the VIX goes up 10% during the period the value of the VXUP shares before the Regular Distribution would be  10+ 1/4* (44-40) = 11 and VXDN would be 10 – (1/4)*(44-40) =9.  The distribution for VXUP shares would be $2 per share (cash or share equivalents) and the new VXUP value after the distribution would be $9.   Net gain to the VXUP shareholders pre-tax would be +$2/share dividend – $1/share capital loss  = + $1 net, which is a 10% gain from the starting value.  Expect confused shareholders at this point.
  8. The funds do a Special Distribution if either experiences more than a 75% gain in the Share Class from the start of the monthly cycle. The maximum gain is capped at 90%.  This prevents the losing side from losing more than their initial investment.  The Special Distribution dividend for the winning fund is essentially the difference between the ending values of the opposing share classes on the Special Distribution date. The next trading day the Up and Down Class Share value will be set to the value of the losing side.  My rough simulation results below suggest that there would have been six such events since 2002, the last one (surprisingly) being on October 13th, 2014.




  1. The Share Class value of the funds are published every 15 seconds during market hours as the indicative value (tickers ^VXDN-IV & ^VXUP-IV on Yahoo Finance).  In addition I have created a 20 minute delayed report that provides IV information along with tracking error and other tidbits.   If the funds are working well (which they aren’t) the IV prices should be close to, or within the market bid / ask spread.  The difference between the IV value and the traded value of the funds is called the tracking error.
  2. If the tracking error of day end trades vs IV values exceeds 10% for 3 consecutive days a Corrective Distribution (CD) will be scheduled to be implemented as part of the next Special or Regular Distribution (the first 60 days of operation are exempt).  A Corrective Distribution is a hard reset on the funds, where Accushares doubles the number of outstanding shares and distributes them in such a way to put every shareholder into a risk neutral position with equal numbers of Up and Down Shares.  Since the asset value of the fund won’t change at that point the NAV and Share Class value of the shares will have to drop by a factor of two (unless they do a simultaneous 2:1 reverse stock split).  The way the process works the premium / deficit due to tracking error will be removed from shareholder’s accounts at distribution time—it’s a very clever approach.   Since the market knows the CD is coming up the tracking error will drop to zero right before the regular distributions.  However people will get burned if a Special Distribution occurs once the monthly CD threshold is reached.  There’s no way to predict when a Special Distribution will occur.   Before introduction AccuShares did not think Corrective Distributions would be necessary, but it’s looking like they will be an every month thing after the startup period.   It also looks like they will only improve tracking errors for a few days.
  3. The best case scenario for AccuShares is not surprisingly heavy demand for both Up and Down shares. This would result in increasing assets under management and fee/investment income.  The worst case would be heavy buy demand for one share type and heavy selling on the other.  In this situation a key difference between VXUP and VXDN vs other Exchange Trade Products comes into play.   Accushares requires that APs bundle equal numbers of Up and Down shares when transacting share creations / redemptions.   This is unprecedented to my knowledge.  Every one of the other 1600+ ETPs has just a single fund involved in the creation / redemption process.  If there is a buy / sell imbalance between these two funds it may become unprofitable for the APs to do the arbitrage transactions that they typically execute that pull trading values closer to IV values.  If this occurs trading and IV values of the funds might become uncoupled from each other—which is a bad thing in the ETP world.

Many a volatility investor has cursed their screens when they have called a VIX move correctly and see their volatility positions barely move, or even go in the opposite direction.  If AccuShares is successful with VXUP and VXDN I expect a flood of money will come their way.

How To Get Silverlight Working Again on Chrome

Friday, April 24th, 2015 | Vance Harwood

In early April I attempted to logon to Fidelity’s Active Trader Pro using my Chrome browser and I was greeted with:





I was pretty sure Silverlight was installed on my system, but I dutifully reinstalled it—and was informed that it was already installed.  Suspecting a browser issue I fired up Internet Explorer where Active Trader Pro ran correctly.

Investigation revealed that Google has decided to obsolete the old Netscape Plugin Application Interface (NPAPI) technology, which Silverlight relies on.   According to Google this change:

 …will improve Chrome’s security, speed, and stability as well as reduce complexity in the code base.

In April Google blocked all Chrome plugins using NPAPI by default but provided an override for advanced users.  That override is scheduled to go away in September 2015.

I used Fidelity’s chat line for recommendations on how to address this.   Their opening bid was for me to switch to Internet Explorer or Firefox.  I declined and asked if there was a workaround for Chrome.   The first step was to start up my Chrome browser and type “chrome://flags/” (no quotes) in the address bar and enter.   The resultant page:


Next I was instructed to search for NPAPI on this page; you can use the Search function (Ctrl +F) to do this.   The “Enable NPAPI” item was towards the bottom of the 1st page.   I clicked the enable link.

Next I was instructed to type “chrome://plugins” (no quotes) in the address bar and enter.   My plugin page looked like this:


On my system Silverlight showed up as the 3rd plug-in in the list.  I was instructed to click the enable link and check the “Always allowed to run” box.

At this point Active Trade Pro on Chrome worked.   The Fidelity representative warned that they have seen some problems with streaming information with this workaround, so be aware that streaming quotes might not be valid.

Google’s move puts Fidelity and others like them that use Silverlight in a difficult position—either force approximately 25% of their users to change browsers (Chrome’s current market share), or rewrite their code to not use Silverlake technology (e.g., switch to HTML5).  And they only have until September to get this done…

I’m with Google on this one. I’ve been involved with large software projects where old technologies have become an increasing source of complexity and performance issues.  It’s painful to move forward, but in the long run the user really benefits from obsoleting the old code.

How Does UVXY Work?

Wednesday, March 18th, 2015 | Vance Harwood

Exchange Trade Fund UVXY and its Exchange Traded Note cousin TVIX are 2X leveraged funds that track short term volatility.  To have a good understanding of UVXY (full name:  Ultra VIX Short-Term Futures ETF) you need to know how it trades, how its value is established, what it tracks, and how ProShares makes money running it.


How does UVXY trade? 

  • For the most part UVXY trades like a stock. It can be bought, sold, or sold short anytime the market is open, including pre-market and after-market time periods.  With an average daily volume of 21 million shares its liquidity is excellent and bid/ask spreads are a penny.
  • It has an active set of options available, with seven weeks’ worth of Weeklys and close to the money strikes every 0.5 points.
  • Like a stock, UVXY’s shares can be split or reverse split. If fact, UVXY reverse split 4 times in its first three years of existence—which may be a record.  The last reverse split was a 4:1 and I’m predicting the next one will be around May-June 2015 and will be a 4:1 ratio also.  See this post for more details.
  • UVXY can be traded in most IRAs / Roth IRAs, although your broker will likely require you to electronically sign a waiver that documents the various risks with this security. Shorting of any security is not allowed in an IRA.


How is UVXY’s value established?

  • Unlike stocks, owning UVXY does not give you a share of a corporation.  There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends.  Forget about doing fundamental style analysis on UVXY. While you’re at it forget about technical style analysis too, the price of UVXY is not driven by supply and demand—it’s a small tail on the medium sized VIX futures dog, which itself is dominated by SPX options (notional value > $100 billion).
  • According to its prospectus the value of UVXY is closely tied to twice the daily return of the S&P VIX Short-Term Futurestm  This index manages a hypothetical portfolio of the two nearest to expiration VIX futures contracts.  Every day the index specifies a new mix of VIX futures in that portfolio.  For more information on how the index itself works see this post or the UVXY prospectus.
  • The index is maintained by S&P Dow Jones Indices. The theoretical value of UVXY if it were perfectly tracking 2X the daily returns of the short term index is published every 15 seconds as the “intraday indicative” (IV) value.  Yahoo Finance publishes this quote using the ^UVXY-IV ticker.
  • Wholesalers called “Authorized Participants” (APs) will at times intervene in the market if the trading value of UVXY diverges too much from the IV value.  If UVXY is trading enough below the IV value they start buying large blocks of UVXY—which tends to drive the price up, and if it’s trading above they will short UVXY.  The APs have an agreement with ProShares that allows them to do these restorative maneuvers at a profit, so they are highly motivated to keep UVXY’s tracking in good shape.


What does UVXY track?

  • Ideally UVXY would exactly track the CBOE’s VIX® index—the market’s de facto volatility indicator.  However since there are no investments available that directly track the VIX ProShares chose to track the next best choice: VIX futures.
  • VIX Futures are not as volatile as the VIX itself; solutions (e.g., like VXX) that hold unleveraged positions in VIX futures only move about 55% as much as the VIX. This shortfall leaves volatility junkies clamoring for more—hence the 2X leveraged UVXY and TVIX.
  • ProShares achieves the 2X daily return by taking advantage of the fact that VIX futures only require a small percentage (e.g. typically less than 25%) of their face value be deposited as margin to purchase the contract.  By doubling up the number of contracts they own they can double the returns.  To keep this leverage near a constant 2X they have to adjust the number of futures contracts held by the fund at the end of every trading day.  This adjustment is essentially a compounding process.
  • If you want to understand how 2X leveraged funds work in detail you should read this post, but in brief you should know that the 2X leverage only applies to daily percentage returns, not longer term returns. Longer term results depend on the volatility of the market and general trends.  In UVXY’s case these factors usually (but not always) conspire to dramatically drag down its price when held for more than a few days.
  • The leverage process isn’t the only drag on UVXY’s price. The VIX futures used as the underlying carry their own set of problems. The worst being horrific value decay over time.  Most days both sets of VIX futures that UVXY tracks drift lower relative to the VIX—dragging down UVXY’s underling non-leveraged index at the average rate of 7.5% per month (60% per year).  This drag is called roll or contango loss.
  • The combination of losses due to the 2X structure and contango losses add up to typical UVXY losses of 12.5% per month (80% per year). This is not a buy and hold investment.
  • On the other hand, UVXY does a good job of matching the short term percentage moves of the VIX. The chart below shows historical correlations with the linear best-fit approximation showing UVXY’s moves to be about 92% of the VIX’s.    The data from before UVXY’s inception on October 3, 2011 comes from my simulation of UVXY based on the underlying VIX futures.



  • Most people buy UVXY as a contrarian investment, expecting it to go up when the equities market goes down.  It does a respectable job of this with UVXY’s percentage moves averaging -5.96 times the S&P 500’s percentage move. However 16% of the time UVXY has moved in the same direction as the S&P 500.  So please don’t say that UVXY is broken when it doesn’t happen to move the way you expect.
  • The distribution of UVXY % moves relative to the S&P 500 is shown below:


  • With erratic S&P 500 tracking and heavy price erosion over time, owning UVXY is usually a poor investment. Unless your timing is especially good you will lose money.


How does ProShares make money on UVXY?

  • As an Exchange Trade Fund (ETF) UVXY must explicitly hold the appropriate securities or swaps matching the index it tracks. ProShares does a very nice job of providing visibility into those positions.  The “Daily Holdings” tab of their website shows how many VIX futures contracts are being held.  Because of the 2X nature of the fund the face value of the VIX futures contracts will be very close to twice the net “Other asset / cash” value of the fund.


  • ProShares collects a daily investor fee on UVXY’s assets—on an annualized basis it’s 0.95% per year.  With current assets of $700 million this fee generates around $6 million per year.  That should enough to cover ProShares UVXY costs and be profitable, however I suspect the ProShares’ business model includes revenue from more than just the investor fee.
  • One clue on the ProShares’ business model might be contained in following sentence from UVXY prospectus (page 18):
    “A portion of each VIX Fund’s assets may be held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements).”  Agency securities are things like Fannie Mae bonds.  The collateralized repurchase agreements category strikes me a place where ProShares might be getting significantly better than money market rates.  With UVXY currently able to invest around $350 million this could be a significant income stream.
  • According to ETF.com’s ETF Fund Flows tool, UVXY’s net inflows have been around $1.8 billion since its inception in 2011.  It’s currently worth $700 million, so ProShares has facilitated the destruction of about a billion dollars of customer’s money—so far.  I’m confident the overall destruction trend will continue.
  • UVXY has escaped the negative publicity that Barclays’ VXX and VelocityShares’ TVIX funds have generated, but as it continues to grow in size, and continues to destroy shareholder value at eye watering rates it’s probably a matter of time before UVXY starts getting vilified on its own merits or lack there-of.


UVXY is like a loaded gun, effective when used at the right time, but dangerous if you leave it lying around.

UVXY chart

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