Macros: Rarely has one product excited-and confused-so many investors at the same time. The brainchild of Robert Shiller, Alan Weiss and Sam Masucci, Macros are exchange-traded products with a twist: Rather than being tied to a particular index or commodity, they can be tied to … anything. Real estate prices, unemployment rates, GDP growth, currency fluctuations … they are all game.

By opening up these markets, supporters say that the Macros herald a new world of risk control, taking our largest personal and macroeconomic risks and salving them with the calm order of easily tradable hedges.

The idea brings to mind Peter Bernstein's 1996 book, Against the Gods: The Remarkable Story of Risk. In that book, Bernstein argues that mankind has achieved a kind of "mastery over risk." The Internet bubble revealed the flaws in Bernstein's theory, but the Macros rekindled the flame. If we can truly hedge the risk of … everything … we might one day lay our financial worries to rest.

The promise and hope surrounding the Macros reached a fever pitch last fall, as the first products, tied to the price of crude oil futures, wended their way through the Securities and Exchange Commission (SEC). Those first Macros were seen by many as a test case: a way for Shiller's company, MacroMarkets LLC, to prove that the Macros worked. With any luck, they would attract enough assets to support more sophisticated products tied to things like housing, inflation and unemployment.

There were skeptics, of course: skeptics who questioned the choice of oil for the first products; skeptics who wondered how the products would trade; skeptics who asked if anyone truly understood how the Macros worked. But through it all, the Macro supporters express confidence.

"When we filed with the SEC for the Macroshares product structure, we knew the process would require patience and market education," said Sam Masucci, president and CEO of MacroMarkets LLC. "Not being first to market with oil was not a major concern for us because the market education process is the most important hurdle for any new product structure. With the launch of oil Macros, Claymore and MacroMarkets are now positioned to build the Macroshares franchise to introduce new asset classes and risk management tools to investors."

Added David Hooten, CEO of Claymore Securities, which partnered with MacroMarkets to launch the funds, "[W]e consider Claymore Macroshares to be the next generation of exchange-traded securities."

When the oil Macros started trading in November, however, the skeptics had a field day. Almost immediately, the Macros started trading at large spreads to their targeted net asset value (NAV). On January 16, for instance, market observer Greg Newton noted that the Claymore Macroshares Oil Up fund (AMEX: UCR) was trading at a 13 percent premium to its NAV, while the Claymore Macroshares Oil Down fund (AMEX: DCR) was trading at a 10 percent discount.1

The very idea of an exchange-traded fund (ETF) and its cousins 2 is predicated on mechanisms that keep the NAV and the share price in alignment. These were some of the largest premiums and discounts ever seen in the industry, and they called into question the very nature of the funds.

And then came disaster. On December 26-27, a perfect storm of circumstances conspired to send the price of the up Oil Macro (UCR) spiraling to a huge premium above the NAV. What happened, according to industry insiders, was that a large broker wanted to put on a short position, but there was no one to do a creation because the specialist responsible for the product was simply not present on those fateful days. No one else could do a creation, as the product had just one Authorized Participant at the time. To cover the short, the large buyer bought everything, sending the premium to dizzying heights.

As this article was being written, the discrepancy between the NAV and the share price had narrowed considerably (and a number of additional Authorized Participants had entered the market). The discrepancy had not, however, disappeared: UCR was trading at a 6.70 percent premium to NAV, while DCR was trading at a 6.42 percent discount.

The continued discrepancies raise some serious questions: Is the problem permanent? Can it be overcome? More controversially: Is it really even an ongoing problem, now that the perfect storm has passed? And ultimately, will the Macros deliver on their promises, or will they disappear in a poof of unrealized dreams?

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