Like many active managers, Mark Yusko of Morgan Creek Capital Management has some serious gripes about the rise of exchange-traded funds and the ascendancy of passive investing.
And like many of those managers, he's also starting his own ETF to cash in on their popularity -- but with a twist.
Yusko, whose firm invests around 80 percent of its $2.5 billion in hedge funds, has major problems with rules-based ETFs. Possessing "no ability to think," they blindly buy assets regardless of price, hurting investors, Yusko said. Among the chief offenders are minimum volatility ETFs, which he called "one of the worst things ever created." What's more, as central banks ease up on monetary stimulus, "hedge funds are going to win" against passive investing styles, he said.
To that end, Yusko is planning to build an ETF in partnership with AdvisorShares that solves these problems. What makes his fund different is it will be actively managed, shuffling through his firm's 10 best investment ideas.
Once a year, the fund will select new assets representing its top picks, such as buying European financial firms or shorting the U.S. dollar, said Yusko. If approved, the fund would take its place alongside other U.S.-listed actively managed ETFs, which at around $39 billion in assets represent a tiny sliver of the $3.08 trillion market for the instruments.
"It's not a pure
hedge fund per se, but it would allow us to bring
hedge fund-like strategies to the average investor," said Yusko, chief executive of Chapel Hill, North Carolina-based Morgan Creek.
Latest Manager
Yusko, who previously ran the endowment at the University of North Carolina at Chapel Hill, is the latest active manager drawn inexorably into the fast-growing world of ETFs. Precidian Investments has also sought the Securities and Exchange Commission's stamp of approval to introduce ETFs, while most recently, Cliff Asness, co-founder of $195 billion quant firm AQR Capital Management, asked the regulator for permission for the first step necessary to start a fund. Eaton Vance Corp. started three active non-transparent ETFs last year.
"The reason why a lot of asset managers and active managers are looking at this is that the distribution channel is so great," said Rick Redding, chief executive of the Index Industry Association, a trade group. "When you think of all the product benefits of putting it into an ETF -- like the tax benefits -- it's a distribution channel that a lot of them want to be in."
Unsurprisingly for a vocal proponent of hedge funds, Yusko is also a critic of the regulatory requirement that makes most ETFs disclose their portfolio holdings daily. "You don't make Coke tell you exactly what they put in Coca-Cola," he said. Ideally, his ETF would be wrapped in a non-transparent structure, he said, though the SEC has been slow to green light such instruments. Yusko said he hopes to list his fund in time for his 2018 picks.
First Rodeo
It won't be Yusko's first rodeo. His firm previously lent its name to the AdvisorShares Morgan Creek Global Tactical ETF, which closed in May after six years, according to data compiled by Bloomberg. The fund advanced 3.9 percent in its best full year but lost money in 2011 and 2015, according to the data.
Yusko said that this year his firm's portfolios "are well ahead of markets, even though we're hedged."
While some actively managed ETFs have had notable success -- such as Pimco's $7.38 billion Enhanced Short Maturity Active ETF -- most of the assets in the category are concentrated in bond, not equity, funds. Investors to date have appeared more willing to acknowledge managers' skills in fixed income rather than in stocks.
"The active space in general is an exceedingly difficult place to add value," said Ben Johnson, director of global ETF and passive strategy research at Morningstar Inc. "If you're going to plug your strategy in an ETF as opposed to a mutual fund, it might help you get more eyeballs, but it's not going to do anything to boost your ability to pick winners over the long run."
