Fidelity Investments has petitioned the Securities and Exchange Commission to launch non-transparent, exchange traded active funds, or ETAFs as a way to capitalize on the more efficient exchange traded product wrapper while limiting active managers’ risks to potential front runners.
According to a recent SEC exemptive relief filing, Fidelity is seeking approval to operate non-transparent ETAFs.
Unlike traditional 1940s Act mutual funds, Fidelity is looking to build its offering around a closed-end fund structure. The move may be a way to modernize the traditional closed-end fund structure by utilizing desirable features of an ETP, such as flexibility to trade an exchange in real-time pricing and capitalize on tax efficiencies. Additionally, the new structure may eliminate issues based by traditional closed-end funds, such as discount to net asset values and liquidity, according to Fidelity.
The main point is that the ETAF structure will seek to make active equity investment management available in a non-transparent exchange traded vehicle as a way to protect shareholders from front-running. The fund would will reveal its portfolio with a 30-day disclosure delay of the holdings.
“In order to achieve efficient markets and daily pricing, a tracking basket comprised of the ETAF’s most recent publically disclosed holdings and representative ETFs (which mirror the current portfolio characteristics) will be published daily along with an updated measure of value of the tracking basket that will be disclosed every 15 seconds throughout the trading session in the ETAF’s shares,” Fidelity said.[related_stories]
The ETAF will execute creations daily, like ETFs, through in-kind baskets and issuing new shares to an Authorized Participant. However, there will be no daily redemptions available to any investors. Instead, APs will have to hold a hedge until the end of the week before arbitraging price discrepancies.
“It gives institutional investors an out,” Dave Nadig, Director of Exchange Traded Funds at FactSet, said in a note. “Should a major hedge fund or endowment decide to liquidate a position, this feature allows the institution to entirely bypass the trading floor, guaranteeing that it gets a ‘fair’ price for its shares, regardless of what the market impact of the transaction might be. In my opinion, this is a good thing and likely makes it easier for institutions to wade in on a less transparent product.”
There have been a handful of so-called non-transparent, ETF-like petitions set to SEC over recent years. For instance, Eaton Vance’s NextShares suite of exchange traded managed funds, or ETMFs, have already received SEC approval. Other structures, such as those from Precidian Investments, BlackRock, T. Rowe Price and Capital Group, are still waiting on regulatory approval.
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