MacroShares’ planned initial public offering for its Major Metro Housing exchange-traded products has failed, due to an imbalance in orders between investors wanting to buy upside exposure to U.S. residential home prices and those wanting to invest on the downside. 

The company says it will now launch the products using a traditional, market-maker-driven process; the new launch is scheduled for sometime in the next few days.

"We set a $125 million minimum for the initial public offering and we had IPO interest that was a multiple of that," said MacroShares Chief Executive Sam Masucci. "Ultimately, however, we could not get $125 million to cross at appropriate prices."

The Major Metro Housing Up (NYSE Arca: UMM) and Major Metro Housing Down (DMM) are designed to deliver 300% and -300% of the return of the S&P/Case-Shiller Home Price 10 Index over the next five years.

They will achieve that return not by buying actual houses, but by following MacroShares' patented "teeter-totter" product structure.

Under that structure, the Up and Down Macros hold Treasury securities as their sole asset. As the benchmark index moves up or down, those Treasuries are transferred back and forth between the Macros. The structure allows MacroShares to launch products tied to any reference price, including previously uninvestable benchmarks like national home prices. 

To function, however, there must be an equal number of Up and Down shares, and the price of those paired shares must sum to a predefined number; in the case of the housing Macros, $50 (i.e., if UMM is worth $30, DMM must be worth $20).

And that's where the IPO had problems, according to MacroShares.

The firm tried to raise assets for the products through a Dutch-auction IPO, wherein investors "bid" for IPO shares at prices of their choosing. At the end of the IPO, software was supposed to match up orders to ensure the largest possible IPO at the best possible price.

Price Imbalance 

While there was significant interest, the prices at which investors were willing to buy UMM and the prices at which they were willing to buy DMM did not add up.

"There was an imbalance," said Masucci.

MacroShares will now launch the product the traditional way, with a market maker putting up $5 million to "seed" the creation of the first shares of UMM and DMM.

Those shares will be sold on the open market, allowing the public to price the assets in an open environment. New shares will be created to meet demand as it occurs.

"I am optimistic that we are going to see significant asset growth at a fairly steep rate after the traditional launch," Masucci said.

Masucci noted that the IPO road show gave MacroShares an opportunity to meet with and educate more than 70 institutional investors about the products, and said that there was significant interest. He said that MacroShares will reapproach those investors once the product is launched.

He expects many of them to make purchases in the open market.

"The industry has been watching this IPO closely as a potential solution to lack of availability of seed capital," said Masucci, referring to the fact that many ETFs have had a hard time convincing specialist firms to front the $2.5-$50 million needed to create the first few shares of an ETF.

"I've always tried to manage expectations that this was a new launching technology, and that the long-term interest and success of the product is not dependent on the success of the IPO."

In addition to order imbalance, the IPO did face one obvious headwind on the demand side: Investors were being charged a per-share commission to buy shares in the IPO. 

With traditional equity IPOs, that's not a big problem, as investors figure that the share price might "pop" on opening day if there is significant public demand. But with an ETF, new shares can be created on an ongoing basis, meaning there can be no initial-day "pop." 

That created a headwind for selling the shares, according to MacroShares, as investors may have been better off waiting to buy the products after the launch, rather than participate in the IPO.

Masucci said that "buy" interest in the IPO was split. There was a larger number of investors interested in UMM, suggesting a bullish retail outlook for real estate prices. But there was a larger amount of asset interest in DMM, suggesting larger players were looking to hedge their exposure to this market.