New hedge fund managers aspire to accumulate assets rivaling established companies like Bridgewater or J.P. Morgan, but many will likely fall short. Consequently, some asset managers are looking into the exchange traded fund wrapper to gain an edge.
Smaller funds often find it harder to bring in large pension funds and institutions that look for large hedge funds with billions in assets under management and long track records, reports Ashley Lau for Reuters.
As a result, more are beginning to look at ETFs as a way to market their investment strategies, targeting financial advisors and retail investors instead. The ETF structures provides accessibility, allowing any investor to trade the security like a common stock, and requires no minimum investments beyond the price for a single share. [JPMorgan Plans to Enter the ETF Arena, Looks to Active Space]
“It’s a matter of access,” said Mebane Faber, chief investment officer at California-based Cambria Investments.
Faber has converted a former hedge fund strategy into the AdvisorShares Cambria Global Tactical ETF (NYSEArca; GTAA), which now holds $40.9 million in assets under management. He also hinted at possibly converting his other two private funds into ETFs.
Managers, though, will have to be comfortable with the lower fees associated with ETFs. According to XTF data, the average U.S.-listed actively managed ETF comes with an expense ratio of 0.84%. In comparison, hedge funds typically come with an annual management fee of 2% and a performance fee for 20% of profits.
However, the fee cut may make sense for smaller hedge funds as the ETF structure could help asset growth.
“It’s often the managers who are less well-known or struggling to attract assets,” John Shearman, chief executive officer at IV Lions LLC, said in the article. “Some of these managers are trying to grow their business but struggling to compete in a hedge fund market that’s increasingly dominated by larger funds,” so they move to mutual funds or ETFs.
Many asset managers, though, are loath to enter to the active ETF space as daily transparency requirements would reveal their secret sauce. Nevertheless, the Securities and Exchange Commission is looking over some proposed nontransparent ETF structures from BlackRock, State Street, and Eaton Vance, among others. [NYSE Pushes to List Nontransparent ETFs]
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.