To say the equity markets have been extremely turbulent over the last several weeks would be an understatement. Nothing demonstrates this better than the benchmark indicator of volatility, the CBOE Volatility Index, along with VIX-related exchange traded funds.
When looking at the period of July 31 to August 21, volatility jumped 131.3%, from an index level of 12.1 to a level of 28.0. Further, from Monday August 17 close through Monday August 24 open, VIX saw a move over 300% from 13 to over 53. If we drill down further to demonstrate the magnitude of the market volatility, the August 21 move of 46% was the third largest daily move in the VIX index since 2005.
For investors looking to profit on this market volatility and who were able to pick the timing of the move, there are a variety of exchange traded products at their disposal. A surprising performer was the lesser known volatility newcomer, the AccuShares Spot CBOE VIX Up Shares (NasdaqGM: VXUP). While observers may have perceived a share price drop, the fund made a large cash distribution, reflecting a return of over 90%, but ETF utilized some non-traditional mechanics to deliver that return, which might confuse some investors. Investors could also track the bearish equivalent through the AccuShares Spot CBOE VIX Down Shares (NasdaqGM: VXDN).
Taking a more in-depth look at the mechanics of the AccuShares product, we see that the rapid rise in volatility caused the fund to declare a “Special Distribution” on August 21, which was paid to investors on August 28 – according to the prospectus, a Special Distribution occurs when the underlying index closes +/- 75% from the most recent distribution date and is described as a “protective measure” for investors. From August 17 to August 21, the index moved by 115.3%, surpassing the 75% trigger.
By automatically paying out a return based on the actual movement of the VIX, investors in VXUP were able to capture a higher percentage of the dramatic spike in the VIX for that 5-day period compared to the traditional futures-based alternatives.
In addition to the Special Distribution mechanics, we also saw that AccuShares announced a Corrective Distribution on August 21 – according to the prospectus, a Corrective Distribution is designed to force the removal of prevailing and consistent trading premium and discounts as compared to the closing NAV’s and occurs when the trading prices of the ETF deviate +/- 10% from the closing NAV over three consecutive days. This will be the first occurrence of a Corrective Distribution since the fund announced the feature was in effect.
What this means for holders of VXUP and VXDN, on the next regularly scheduled Regular Distribution, in this case, September 15, the funds will allocate an equal number of offsetting shares – holders of the Up Class Shares as of September 15 will be issued an equal number of the shares of the Down Class Shares, and vice versa, resulting in a risk-neutral exposure to equity volatility. In short, this means that shareholders will own a position in both Up and Down shares after the September 15 distribution declaration.
As measured against spot VIX, premiums and discounts in the shares have alienated some investors and it will be interesting to see the impact of the corrective on trading prices. It is also likely that the fund management is evaluating other options to help correct this issue.
On September 8, AccuShares also gave a 10-day notice of the estimated Regular Distribution and the Corrective Distribution, which results in equal and offsetting shares, and a reverse share split at a specified conversion rate – according to the prospectus, reverse share splits are triggered after the class value per share dips below $4.00. VXUP was trading at around $1.5 and VXDN was at $1.9 Wednesday.
On September 15, AccuShares will announce its Regular Distribution to either VXUP or VXDN, depending on the close of the VIX on that day, as well as announce the Corrective Distribution and the Reverse Share Split. Investors who receive an equal amount of the opposite share class as a result of the Corrective Distribution will have to evaluate their portfolios post Reverse Split to determine which exposures they are interested in maintaining.
For more information on the CBOE Volatility Index, visit our VIX category.