# HNU Mistake



## younger (Oct 23, 2009)

Ok people, I will admit right off that I made a mistake a few months back and now I could use some advise on my best option.

As you are likely aware, HNU is a Horizons bull ETF on Nat gas. (2x)

When I bought I just didn't do my DD to discover it is really only for very short term trading (ie: hold for a few days or weeks max.) due to volitility of NG and ETF rebalancing yada yada...

Anyway, I bought at $29.15 and of course it is half that now so I am down about $10k ... ouch!! 

My question is what to do now? I expect NG to move higher some day but will rebalancing & volitility wipe out any & all possible gains? Should I take my lumps now or hold tight for another 5-6 months in hopes of cold weather or a huricane or whatever will move gas prices up?

Can my investment go to zero?

Any help would be appreciated!


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## mogul777 (Jun 2, 2009)

Is my crystal ball shinier than yours? LOL. 

If you expect NG to increase in price than why would you want to sell now? Why did you buy it in the first place? Perhaps you know the answer that you didn't have when you greedily jumped on it. 

Of course price and moreso volatility can wipe out any gains, and of course it can go to zero. However, it won't... fifty cents would be more likely. These funds have and will lose about 96% any given time period. Sucks, but now you've figured it out and next time hopefully you'll know better.


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## Mockingbird (Apr 29, 2009)

younger said:


> Ok people, I will admit right off that I made a mistake a few months back and now I could use some advise on my best option.
> 
> As you are likely aware, HNU is a Horizons bull ETF on Nat gas. (2x)
> 
> ...


You might want to read this before you invest more of your hard earned money. Good luck.

Contango Effects Explained


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## younger (Oct 23, 2009)

*Greed*

No doubt about it, I got greedy & invested without first understanding the product.

Thanks for both your responses.


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## stinsont (May 29, 2009)

I have a stake in HNU at 12.80. The highs and lows are crazy, it should bounce back but I have lost $2,000 of my gain this week (actually over the past 2 days)...


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## cannon_fodder (Apr 3, 2009)

You might be better off, if you really are sure that Natural Gas will go up during each month's contract to sell HND short. There will be 'leakage' either way you go - you may as well benefit from the leakage by selling short the product that is opposite the direction that you believe the underlying position represents.


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## dkrish (Jul 23, 2012)

cannon_fodder said:


> You might be better off, if you really are sure that Natural Gas will go up during each month's contract to sell HND short. There will be 'leakage' either way you go - you may as well benefit from the leakage by selling short the product that is opposite the direction that you believe the underlying position represents.


Can someone explain to me why there is not a correlation between the Natural Gas Price Chart and HNU Price Chart; For Example On Jan,04,2012 the Price of Nat Gas was around $3.10 and the price of HNU was around $30.00. Today (Jul,07,2012) the price of Nat Gas is around $3.10 but the price of HNU is only $15.85.

Thanks


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## Andre112 (Apr 27, 2011)

Mockingbird said:


> You might want to read this before you invest more of your hard earned money. Good luck.
> 
> Contango Effects Explained


I read it but I don't understand a single word.


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## maxandrelax (Jul 11, 2012)

There is serious decay because HNU is a play on commodity futures. It is usually in contango and you lose on long term holds. I don't think it can go to zero, but it will continue to reverse split the stock as it declines. I can't do the math on it for you, but I suggest you check out one of the larger boards that starts with a Y to help you with this. I am in the hole with a handfull of TVIX (a gamble on increased volatility in the mkts) It has been destroyed by contango the past few months. I am half down and will hold, because I see volatility substantially increasing in the next few months, otherwise I would have sold and took my loss. 

Regarding natural gas prices... I don't see them spiking any time soon and if it does reach 4 bucks or more, all the small producers will bring their currently mothballed wells back into production in an effort to stay solvent, keeping gas prices low for a while longer.


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## Andre112 (Apr 27, 2011)

http://tradingchief.com/stock-board...newbies-on-leveraged-contango-ETF's&pid=73390

I think this explains it.


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## blin10 (Jun 27, 2011)

it's like vxx it does not follow vix to the dot... problem is you might have to hold it for years to get to even, you can also sell it and try to make money elsewhere, nobody can answer that question really.... not sure what to even suggest


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## Causalien (Apr 4, 2009)

blin10 said:


> it's like vxx it does not follow vix to the dot... problem is you might have to hold it for years to get to even, you can also sell it and try to make money elsewhere, nobody can answer that question really.... not sure what to even suggest


The rebalancing and time decay that are inherent in these products will eventually bleed you dry. Whenever someone tries to justify their action to me on one of these etf with the word "hold". I say: NO NO NO. You are already screwed. The best thing that can happen to you now is hoping for a spike up and selling at a loss during that spike.


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## andrewf (Mar 1, 2010)

Not all futures based ETFs suffer from contango. Naturgal gas and VIX are two of the most dramatic, though. Holding VXX long term is a bad move. I have long term puts on this ETF and have realized significant gains since the beginning of the year. Your money is gone, and it unlikely to be recovered by continuing to hold, even if VIX spikes.


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## dkrish (Jul 23, 2012)

*Thanks for the info*



Andre112 said:


> http://tradingchief.com/stock-board...newbies-on-leveraged-contango-ETF's&pid=73390
> 
> I think this explains it.


Thanks for the link...... I finally understand why the HNU chart does not follow the NG chart. That is a great article on CONTANGO and Re-Balancing.


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## VJ99 (Apr 24, 2012)

Contango explained:

Today I go to the gas station and I fill up at $1.25/lt

Next month, I'm driving to Florida. I'll need a lot of gas. 
I fear that gas will go up between now and then.
So I go to the gas station and I say:
Put aside 100 litres for me and I’ll pick it up in one month and pay you then.
Guy says: OK, but it will cost you.....

$1.25/lt + the cost of storing it for a month + the interest on $125 for a month =
$1.25 / lt + 10 cents per lt + .2 cents = $1.352 per litre
Gas for delivery in one month is $1.352 per litre versus $1.25 for spot delivery.
That’s contango.
If the spot price does not change between now and Florida, then in one month the futures contract will be worth the spot price, ie. 1.25 / lt.
It must because there is no more storage required and time is nil so no interest.
In fact, regardless of what happens to the spot price, the futures price must equal the spot price by the time it expires.
In other words, the futures price will erode by the cost of storage and interest over time.

An ETF holding futures will buy the one month futures and then lose that extra cost to erosion over the next month. The steeper the contango, ie. The greater the spread between the spot and the futures prices, the greater the erosion.

That’s why an ETF of futures can lose money even if the spot price of the commodity is rising.

Andrewf: you said some futures-ETFs don’t suffer from contango. Can you tell me which ones? I have my doubts.

Hope that helps.
Regards,
Vikash


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## Canuck (Mar 13, 2012)

ugh, i'm in the same position, i didn't invest as much as you, but in percentages I'm off more than you are. I can't even really follow it cuz i think it's done two reverse splits, and I'm not sure why it's not up a lot more seeing as the price of NG has gone up quite a bit.....think I'm down around 80%.

live and learn


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## sharbit (Apr 26, 2012)

correct me if im wrong but theres not just contago risk. Volatility also causes decay or tracking error from the math alone.

An example: Say Oil on day one rises 10% and then drops 9.1% the next day. Say you buy your 2x etf at 20$.


Day 1: 20 x (1 + 0.1 x 2) = 24
Day 2: 24 x (1 - 0.091 x 2) = 19.63

So you've lost 0.37 or 1.85% per share in tracking error alone. Obviously this is less extreme with lower volitility.

I'd imagine this would be useful for hedging. Say theres a gas report pending and you have a mix illiquid securities you can buy one of the inverse ones to esentially reduce your commodity risk and not have to sell into an illiquid market.

Other then hedging, IMO this isn't an investment but simply gambling.


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## Canuck (Mar 13, 2012)

can HNU do a regular split?


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## andrewf (Mar 1, 2010)

If a futures market is in backwardation, the opposite of contango (the future price is lower than the present/earlier prices), an ETF long those futures will benefit from rolling forward the futures contracts it holds. This can happen if, say, this year's corn harvest is poor and there will be a shortage of corn to feed livestock until the next harvest. You might see backwardation in that situation. The price will be high for futures maturing in the near future, and lower further out.

Not all futures markets are in contango by exactly the amount of the cost of storage. That is a limit on how steep contango can be, as it create arbitrage opportunities (speculators did this with oil in 2008 after the crash, storing oil in tankers), but because commodities are produced continually, it is not necessary to store everything that is sold in later futures contracts. Some of it is selling future production. This happens to be the case right now, as corn is in backwardation.

If you are curious about term structures of various commodities, check out this site:
http://www.hardassetsinvestor.com/w...-backwardation.html?showall=&start=1#wticrude

Currently, natural gas and brent crude are in backwardation, meaning that ETFs holding these commodities long are benefiting from rolling futures contracts (sell high and buy lower in the future).


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## andrewf (Mar 1, 2010)

Also, gold futures tend to have very flat term structures. It currently costs 1% per year to roll contracts from the 1st to 2nd month, which is more or less just the risk free rate.


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## andrewf (Mar 1, 2010)

sharbit, you're right. Much of what HNU has lost is due to compounding risk due to volatility. This is why both the bull and bear funds have negative performance over longer periods. For contango, it is zero sum, whatever the bull loses, the bear fund gains.


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## HaroldCrump (Jun 10, 2009)

ETN should be good alternatives for those ETFs that suffer from contango because of the nature of underlying.
You trade off contango for counter-party risk.
An ETN with a clearly defined fee and a solid counterparty is perhaps a much better alternative than these contango ridden ETFs.


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## andrewf (Mar 1, 2010)

Nope. ETN providers aren't crazy. Most of the indexes they track build in contango (the index is based on rolling futures contracts). The only difference is that the ETN provider takes on the execution risk (tracking error, relative to the index). They still pass through any contango/backwardation through the index.


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## VJ99 (Apr 24, 2012)

Thanks for the clarification, Andrewf.

Backwardation tends to be a short-lived phenomenon and can reverse quickly. Contango is the normal course.
Certainly, while a commodity's futures are backwardated, the ETF will gain on the roll.
But I wouldn't expect this situation to continue for long.

As for calculating contango, I offered a simple example. The cost of storage can vary dramatically, as can people's estimates of the cost. 
Ditto on funding costs. All this will make for different estimates of contango.

vj


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