How Does VXUP / VXDN’s Corrective Distribution Work?

Friday, June 26th, 2015 | Vance Harwood

It’s now clear that the VXUP/VXDN naysayers were right—the actual behavior of these funds is nowhere close to Accushares’ claim that “VXUP and VXDN are the first securities to offer direct “spot” exposure to the CBOE Volatility Index® (VIX).

Accushares has said nothing publicly about the poor behavior of the funds.  Their only response has been to move up the “go live” date of their Corrective Distribution process.

This is a desperation move.  Apparently not understanding what has happened to them they are rushing to use the last weapon at their disposal to fix their horrible tracking error (as high as 18%) relative to the VIX®.   This move will reduce their tracking problem for less than a day and add yet another complexity to these already complicated and broken funds.

Accushares’ Corrective Distribution (CD) is intended to reduce any ongoing differences between VXUP / VXDN’s Net Asset Value (NAV) and its market price.   I don’t know what specific scenarios they were targeted with this process, but I’m guessing they were worried about a slow, progressive creep in the market prices versus the NAV.

The CD is triggered if there are 3 consecutive days where the tracking error (difference between NAV and closing price) is 10% or greater.  To be a valid closing price the last trade must occur within 30 minutes of market close.   When the CD is triggered it doesn’t occur immediately, it’s scheduled to accompany the next monthly Regular Distribution or a Special Distribution if that occurs first.  A Special Distribution is triggered by a greater than 75% rise in the VIX compared to the reference VIX value established at the beginning of the monthly cycle.

Accushares did not expect frequent CDs to be required, in the prospectus they state: “The Sponsor expects that Corrective Distributions will be infrequent, and may never occur.”

It’s likely they will occur on a near monthly basis.    When there is a significant gap between the VIX’s value and VIX futures prices (which is most of the time) the VXUP/VXDN tracking error will be large.  See this post for a near real time accounting of these errors.

With a combined Regular Distribution and Corrective Distribution three things occur:

  1. The NAV of the higher valued fund is set to equal the NAV of the lower valued fund.
  2. A dividend is issued that compensates the holders of the higher valued fund for the drop in NAV value. The dividend is either in cash or an equal number of VXUP/DN shares with a net value equal to the cash dividend.
  3. Accushares issues a new complementary share to every shareholder. If you have VXUP you will get VXDN shares and vice versa.  This is the Corrective Distribution mechanism.

Since Accushares can’t create assets out of thin air they must compensate for the newly doubled number of shares outstanding by dropping their value by half (or do a 2:1 reverse stock split).

The effect of the Corrective Distribution is not obvious.  Working through an example is a good way to understand it.   Imagine that a CD has been triggered and that a Regular Distribution is about to occur.  You own 1000 shares of VXUP.  Let’s assume that the market price of VXUP is $27.5, the VXUP NAV is $25, and that the VXDN NAV is $22 at market close right before the distribution.

You would receive a dividend of $3/share due to the resetting of VXUP’s $25 NAV value down to VXDN’s ending cycle value of $22.   You would also receive 1000 shares of VXDN.  The new NAV value would be $22/2 = $11 / share because Accushares doubled the number of shares outstanding.

Before the CD the VXUP shares in your account were worth $27.5 X 1000 = $27.5K.   After the Regular / Corrective Distribution your account has:

Your net account value drops to $25K—your $2.5K premium over NAV has disappeared.   Any premium over the closing NAV value is wiped out by the CD.  The next day VXUP will likely trade at a multiple percentage points over NAV, but your VXDN shares will like be trading at a symmetrical discount from NAV, so the net value of your shares will remain at around $22K.   Accushares has essentially cashed out your account at the NAV price—no premium for you…

No diligent shareholder will willingly take this sort of loss, nor short seller pass up this opportunity for profit; the market will ensure the value of these funds converges near to NAV the eve of the distribution.

From an entertainment value perspective there will be a couple of things to watch once the CD mechanism becomes effective:

  1. Will traders attempt to prevent CD’s from happening? Imagine a scenario where some groups are trying to prevent a CD from happening by selling, or short selling shares, while others hoping to profit from a CD are buying shares hoping to keep the tracking error above 10%.
  2. How low will the tracking errors go before the CD date? Short sellers would tend to drive the tracking errors to zero, but the about to expire VIX futures values will be decaying rapidly at that point, so significant intra-day profits might still be available to arbitrageurs on the last days of trading.

The net effect of the CD will be to complicate and disrupt an already difficult situation.   It won’t fix the funds.  What Accushares should do is eliminate the Corrective Distribution.

Once broken is better than twice broken.

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

Thursday, May 21st, 2015 | Vance Harwood

Eli Mintz, the publisher of, 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.

Why Silverlight Won’t Work on Chrome

Friday, April 24th, 2015 | Vance Harwood


In early September, 2015 Google stopped supporting NPAPI technology on Chrome.  There are no workarounds.  This breaks software packages like Microsoft’s Silverlight, which in turns breaks applications like Fidelity’s web based version of Active Trader Pro.  Many other browsers still support NPAPI, but they (except for Microsoft) will probably follow Google’s lead and drop NPAPI support eventually.   Fidelity recommends switching to their client based version of Active Trader Pro.  I have done that and it seems to be working well, but unfortunately this is not a solution for people not using Windows based computers.



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.

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