Weston ETFs: Odd Couple in Flourishing Market

Chidem Kurdas

Only a few years ago, there wasn’t much common ground between hedge funds and exchange-traded funds, except that the former sometimes traded the latter. Now we see an established hedge fund seeder and fund of funds manager,  Albert Hallac’s Weston Capital, joining forces with an ETF developer and marketer.

Raising money for hedge funds via the usual private placement route is tougher than it’s ever been. Hence other ways of getting capital look attractive. As the Weston announcement says, “The ETF sector has assets more than $1 trillion and is the fastest growing segment of the fund management industry.”

So, Weston has become part of Fund.com Inc., a financial services company that owns a majority stake in AdvisorShares, one of the few entities that has approval from the Securities and Exchange Commission to create actively managed ETFs.

According to AdvisorShares chief Noah Hamman, Weston and AdvisorShares are “perfectly complementary”. Until recently that would have been a surprising claim and even now it is not obvious. Mr. Hamman says they will work with Weston “to originate ETFs as well as help other managers launch their own ETFs and to market our actively managed ETFs to institutions worldwide with the expertise of Weston Capital’s established sales force.”

One way to understand this is to consider what’s happening in the European fund world. UCITS III, a mutual fund format that allows hedge fund-type strategies and can be used to create products to be sold across Europe, attracted a lot of interest from hedge fund managers.

There are now enough UCITS hedge funds that an index system has been developed for them. The recently launched UCITS Hedge-Tomlinson indexes identified  about 130 such funds, 87 of which met the index requirements.

Perhaps ETFs will do in the US what UCITS III did in Europe. The object of the Weston and Fund.com deal is apparently to launch a series of ETFs with hedge-type strategies.

As Mr. Hallac puts it, “In particular, we see great potential for growing our assets under management and related fee income by expanding our seeding platform to include the origination and development of new actively managed ETFs.”

Another ally in this venture is Harcourt AG, a fund of funds mostly owned by Vontobel Group, a $70 billion Swiss banking business. Weston and Harcourt will develop new hedge funds.

Unconventional ETFs – for instance from Direxion and WisdomTree – are a growing sector. However,  ETFs have attracted short-term traders more than buy-and-hold investors.   Hedge funds are certainly big traders of ETFs. The question is whether they can become ETFs that appeal to investors.

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