Goldman Sachs details plans for liquid alts, 'smart beta' ETFs

Goldman Sachs has further detailed its plans for the fast-growing ETF market, filing documents to offer 11 specialty and alternatives funds. Late last week the fund company filed preliminary prospectuses with the Securities and Exchange Commission for funds that try to emulate hedge fund-style strategies like equity long-short and event driven. The firm is also planning funds with the brand name “ActiveBeta,” which attempt to outperform market-cap-weighted market indexes. The funds deviate from the methodology of allocating to securities based on their size as traditional indexes do, instead preferring factors like low volatility. While they rely on rules-based indexes in making security selection, many see them as “active” management because they deviate from traditional indexes such as the S&P 500 or the Russell 2000. Those funds are often called, controversially, “smart” or “strategic” beta. And they've been capturing a lot of the recent growth in the ETF market, about one of every $5 U.S. investors put into ETFs. Meanwhile, hedge-fund-style strategies have also been gaining steam in retail wealth management since the 2008-2009 financial crisis as advisers looked to tamp down the risks in stock and bond markets. Mostly in the form of mutual funds, so-called “liquid alts” have been growing at eye-popping rates. Alternatives mutual funds and ETFs held nearly $206 billion in the U.S. as of Sept. 30, up an eye-popping 764% from $24 billion a decade ago, according to Morningstar Inc. The funds drive higher revenue to managers than traditional mutual funds, increasing the value of success in that marketplace. Goldman's hedge-inspired ETFs would be index-based funds-of-funds, not actively managed, tracking an index that attempts to replicate the performance of exotic strategies that ostensibly would not be correlated to the returns of the broad market. Goldman has filed several applications that need approval from securities regulators in order to offer the funds. The filings are preliminary, and Goldman Sachs is under no obligation to issue the ETFs even if it receives approval from the SEC. But the new filings could indicate progress toward approval and they provide the most detailed snapshot yet of how Goldman — a money manager with a slew of “liquid alts” and more than $100 billion in mutual funds altogether — plans to build out a business in the fast growing, $2 trillion market for ETFs. The fund company offers two exchange-traded notes, a cousin of ETFs, but has not yet been allowed by regulators to manage its own ETFs.