Will Hershey
@maybebullish
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Co-founder @roundhill. Exchange-traded funds & markets.
New York, NY
Joined November 2014
ETFs are continuing to grow in popularity, which is awesome. Also means it’s important to understand the basic dynamics:.
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While several narratives have developed for the rationale behind the increasing $MSTR premium against its BTC holdings, I think there is a simpler explanation. The first levered single stock ETF referencing MSTR began trading on August 15th. On that date, MSTR closed at a.
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8) As a result, the market maker is no longer long the underlying ABC components (those shares were delivered to ETF trust). Nor are they short shares of ABC (newly created ETF shares have offset their previous short position). This is called the in-kind creation process.
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@profplum99 Regardless the real story not being discussed IMO is how the funds are using options for a majority of exposure at this point. That’s going to make it awfully difficult to meet their investment objectives. They also are long very deep ITM strikes that will make quarter end RIC.
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One additional quirk to be aware of. These funds have started to add exposure via options rather than swaps, either due to swap capacity limits or VaR constraints. You can see the specific strikes in the Fund’s daily holdings files.
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1) You submit an order to buy 100 shares of an ETF, ticker ‘ABC’. If there is a “natural” seller (i.e. an ABC shareholder that is willing to sell), your trade is executed. You buy 100 shares of ABC from the “natural” seller. The trade is complete.
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3) The market maker may have sold existing inventory from its balance sheet. More likely, however, is that the market maker didn’t own any shares of ABC before the trade. Instead, they borrowed 100 shares of ABC to sell to you. The market maker is now short 100 shares of ABC.
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7) In order to do so, the AP delivers 50,000 shares worth of the underlying ABC components to the ETF trust, which in turn issues 50,000 “newly created” shares of ABC.
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4) The market maker doesn’t want to take price risk. As a result, simultaneous to shorting 100 shares of ABC, the market maker buys 100 shares worth of the underlying basket. The market maker is now long 100 shares worth of the underlying ABC basket, and short 100 shares of ABC.
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6) Once the value of their hedged traded reaches the size of one creation unit (i.e. 50,000 ETF shares worth), the market maker places a trade via an Authorized Participant (“AP”) to “create” new shares of the ABC ETF.
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2) However, there isn’t always a “natural seller.” Instead, you submit an order to buy 100 shares of ABC. In this scenario, a market maker steps in to make you a price. You buy 100 shares of ABC from the market maker.
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5) The market maker repeats this process over and over until they have accumulated a large short position in ABC and a large long position in the underlying ABC basket components.
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@profplum99 I thought the same but I don’t see this in either of the ETF holdings files (nor any Flex strikes that would be hedged with these particular listeds).
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Took us ~5 years but we now have our first billion dollar ETF!.
We are pleased to announce that the Roundhill Magnificent Seven ETF $MAGS has surpassed $1 billion in AUM. Learn more:
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@EricBalchunas Create to lend maybe? Only thing I can think of given it’s a superior vehicle to short at 1.5% management fee.
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@laurashin @EricBalchunas When does he expect options listed on the spot ETFs? . Asking for a friend.
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There is a ton of attention around the spot BTC ETFs, and a result, many accounts on here are hyper focused on the net flow figures. While this is generally all good and well — assuming you are tracking over time and keeping tabs on momentum — it’s important to understand that.
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Thank you to all of our investors for your continued support. Our full lineup of ETF offerings here:
We’re pleased to announce that Roundhill has surpassed $4 billion in assets under management (AUM). Thank you to all of our partners and investors for helping us achieve this milestone. We look forward to continuing our growth with your support.
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Probably a good time for a repost.
A GENTLEMAN’S PRIMER ON SHORTING INSOLVENT SHITCOS. So you’ve found a ShitCo. It’s such an ugly zombie it couldn’t be an extra in season 19 of The Walking Dead .But it’s still got a $185m cap.And you want to be the one to mung the last rancid, putrefying drops out of that corpse.
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@EricBalchunas Well in this theoretical future wouldn’t the token = the underlying asset?. Like a company would issue tokenized shares directly on Solana instead of on NYSE. And they would function the same, entitle shareholders of record to dividends, etc.
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@baccredited That works for an intermediate term view. If you’re looking for something more realtime, best to look at % of daily volume occurring on the ask vs. bid as its likely decent indicator of directional flow.
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@SqlFinanceGal @Coinhungry1 @profplum99 On the first part, swaps allow for precision that options (particularly on an underlying like MSTR) don’t. Because it appears as though swap capacity is tapped out (or VaR limits breached), the funds are primarily buying a mix of options in an attempt to replicate what a full.
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I have a hunch we may be starting to see PB capacity limits coming into play as of today….
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@ILiketoCope Any RIC mutual fund or ETF will likely require a Cayman sub to invest in spot bitcoin grantor trusts. Grantor trusts are considered pass through and any investment gains from BTC may be considered “bad income”.
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@ToddRosenbluth @MazzaDave @roundhill @MaloneySandwich Thank you Todd! And yes, Tim and I aren’t going anywhere :).
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@DaveNadig I have no problem with the small allocation to privates, it’s allowed per rule. But where I get upset is the misleading of retail. What are the fees on the SPV? Management fee? Carry?. At least disclosed the risks properly in the Fund documents!.
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@SqlFinanceGal @Coinhungry1 @profplum99 On the RIC diversification side, fiscal quarter end compliance is critical for maintaining preferential tax status as a RIC. Derivatives are measured at market value. For swaps, this can be as simple as resetting the swap prior to quarter end to regain compliance (therefore.
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@EMcArdleInvest Wild guess but maybe some create to lend activity? . All else equal the higher fees makes it attractive short leg in any sort of arbitrage/basis trades.
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@ILiketoCope In terms of why they waited until now to file, they needed the ARKB registration to be effective prior to the filing.
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@DilksJay 25% is the limit for maintaining tax compliance as a RIC. Would apply to TSLA holdings as well.
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@MidwestHedgie Yes. Of course the ADV has exploded *since* these took in billions in AUM. So perhaps a bit of causality there.
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@EricBalchunas @RebeccaSin_SK @thetrinianalyst Will they be classified as PFICs for U.S. tax purposes?.
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@NateGeraci Looks like they own it through an SPV, I wonder what those embedded fees look like….
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@ConsensusGurus @CoorsLightCEO @Kalshi @mansourtarek_ Can’t do parlays though, which is where the real $$$ is.
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@MidwestHedgie And yes, similar net effect of daily resets with options (assuming deltas being managed appropriately). Other potential issues with use of options versus swaps. But those won’t matter… until they do.
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