UBS introduces new ETNs for risk on, risk off trade tied to newly created Fisher-Gartman index

By Emma Trincal

New York, Nov. 30 - UBS AG, London Branch launched Wednesday two new exchange-traded notes linked to the Fisher-Gartman Risk index, a newly created index that aims to give investors a simple way to implement the "risk on" and "risk off" trades, the bank said in a press release.

UBS priced $10 million of 0% ETracs Fisher-Gartman Risk On exchange-traded notes due Nov. 27, 2041 linked to the index, according to a 424B2 filing with the Securities and Exchange Commission.

The company plans to sell up to $100 million. The initial $10 million of notes priced at par of $25. The remaining $90 million will be sold from time to time at varying prices.

In addition, UBS priced $10 million of 0% ETracs Fisher-Gartman Risk Off ETNs due Nov. 27, 2041 linked to the Fisher-Gartman Risk index.

The shelf for that second series is also $100 million.

The Fisher-Gartman index consists of a mix of long and short positions in various asset classes, the overall value of which is expected to rise when the outlook on markets and the economy is positive and fall when the outlook is negative.

The Risk On ETNs track the performance of the index, increasing in value in up markets.

The Risk Off ETNs, which are inversely tied to the index, are expected to perform well when market outlook turns negative.

"Mark Fisher and Dennis Gartman created the index on Nov. 4 and approached UBS for the new product," a market participant said.

"The bank itself had been approached by hedge funds who wanted new tools to make volatility bets."

Fisher, a futures trader, is the founder of MBF Clearing Corp. Gartman has been the publisher of a daily commentary, the Gartman Letter, since 1987.

The index takes long positions in risk asset classes like commodities, equities and certain currencies and short positions in non-risk asset classes such as government bonds and certain "safe haven" currencies, according to the prospectus.

The weightings for the long and short positions are 150% and 50%, respectively, and the index is rebalanced quarterly.

"Investors now have the ability to implement comprehensive risk on and risk off trades through the purchase of these new exchange-traded securities," according to the bank press release.

The Risk On ETNs were approved for listing on NYSE Arca under the symbol "ONN," and the Risk Off ETNs received the NYSE Arca symbol "OFF."

Correlation

"When the market is rallying, you want to be in the market, it's the risk on trade. When prices are falling, you want to be out of the market and you put on a risk off trade," the market participant said.

"There's nothing quite like this in the market if you want to adjust to sudden market moves.

"The strategy is similar to bets on the VIX, but it's better because the VIX is a little bit esoteric.

"For instance, when the market is up, the VIX goes down but slowly. But when the market drops, the VIX is up a lot. The VIX measures unexpected moves. That's when it pays off.

"With this, you're long or short the risky assets. It's much more representative. That's the type of tool that hedge funds were looking for. It allows them to put on the risk on trade in one convenient security."

The increased correlation across asset classes and geographic regions has pushed demand for products allowing investors to trade "in and out" of risky assets in a fast and easy way, he noted.

"The risk on, risk off trades are fashionable because correlation has been on the rise so much," the market participant said.

"This is the type of product investors are looking for when correlations are high and when the market doesn't care about fundamentals.

"We're in a risk-on, risk-off environment, and as long as correlations remain high, people will put these types of trades on."

Target market

While they originated from hedge fund demand, the new ETNs target mainstream investors as well.

"It's designed for a whole range of investors, from the most sophisticated hedge funds looking at a convenient way to put on the risk on, risk off trade all the way to the individual investors," he said.

A derivatives trader, however, said that he doubted retail players would be looking at those types of products.

"It's an easy way to trade risk on, risk off, especially when you can't trade futures," the derivatives trader said.

"This is an equity investment. It allows people without the ability to trade futures to participate in the risk on, risk off trade.

"However, it's for pretty sophisticated people. I don't think a lot of people would understand it. The average person doesn't know who Dennis Gartman is.

"It's more appropriate for a small hedge fund, I suppose.

"It's a little bit expensive, but certainly, you're not going to be able to buy this anywhere else."

The estimated historical return of the index from Sept. 1, 2006 through Nov. 22, 2011 is negative 13.81%, which is a 2.80% negative return on an annualized basis, according to the prospectus.

However, the index reflects a long exposure to risk, the market participant said, adding that the ETNs give investors and traders alike the option to take the long or short positions they like in either the Risk On ETNs or the Risk Off ETNs.

"It's really a new index that was created with this product in mind," said John Gabriel, an analyst at Morningstar who covers exchange-traded funds.

"Dennis Gartman is a pretty well-known pundit analyst who has a wide following at CNBC and in the press. It will help the exposure, but the proof will be in the pudding," he said.

Both ETNs are putable subject to a minimum of 50,000 notes and a redemption fee of 0.125% of the current principal amount. They are callable in whole beginning Dec. 3, 2012. The company will automatically redeem the notes if their indicative value falls to $5 or less or decreases in value by at least 60% as compared to the previous business day.

The tracking fee for the Risk On ETNs is 0.85% divided by 365 times the current principal amount on preceding day.

The tracking fee for the Risk Off ETNs is 1.15% divided by 365 times the current principal amount on the preceding day.

UBS Investment Bank is the agent.

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