Black Swan ETF - A Lesson Learned from Hedge Funds

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Since the beginning of time (or the 2007 global financial crisis - whichever comes first), investors have sought ways to protect themselves from economic hard times. Whether it is investing in gold or other precious metals, trying to win from market volatility (VIX and tonic, anyone?), or by getting out of equities all together (high grade bonds + cash = safe + safer), investors seek a safe haven during the hardest times.

In the past five years, new strategies have been formed on how to best deal with risk. Today, Horizons Universa rolled out two new ETF's: Horizons Universa Canadian Black Swan ETF and Horizons Universa US Black Swan ETF. Both of these funds are designed to profit when times are tough.

Dubbed black swan in reference to Black Swan events, or unforeseen and unpredictable events (Japan's nuclear meltdown, the global financial crisis, Canada invading the US, 2012 end of the world, etc.), these two ETF's have a notable caveat. There is a 1% management fee and a 20% performance fee!

1 and 20? That is less than most hedge funds you say. But it is nearly unheard of in the world of ETF's. The 1% management fee is nearly four times the norm for ETF's (according to Morningstar analyst John Gabriel), and the 20% performance fee will kick in if the funds beat the S&P or TSX indexes.

Is incorporating these funds in your portfolio worth it? Well, there isn't much data to go by yet, but the fees are daunting for an ETF. If these funds can regularly beat the index during a bull market (even if by a smidge), and they crush it during a bear market, they might just be worth the fees. What do you think

This brings me to my second question. Do you think there will be a trend for "hot" ETF's to start charging higher fees and large performance fees? If you are a portfolio manager (of any type) and you can generate solid year over year returns, why not charge a performance fee?

Will these hot ETF's be the new hedge funds of 2012 and beyond?

Black Swan ETFs

Comments (19)

 
May 30, 2012 - 9:30pm

I have just returned from the conference where the "Black Swan" ETF was whored, and I also had the opportunity to have a word with Taleb. As the CEO of Horizons was rambling I was brainstorming as to why in fucks name would Nassim collaborate with the jokers at Horizons and then it occurred to me- Universa has been "bleeding losses" since inception, making them a perfect fit for Horizons. In any case, I don't believe it would be viable to charge a 1/20 management fee on ETFs that mirror HFs as fund managers are clearly disincentivized so obviously only mediocre funds would opt in for such shenanigans. Rather amusing evening, nonetheless.

 
May 31, 2012 - 1:59am

Macro Arbitrage:
I have just returned from the conference where the "Black Swan" ETF was whored, and I also had the opportunity to have a word with Taleb. As the CEO of Horizons was rambling I was brainstorming as to why in fucks name would Nassim collaborate with the jokers at Horizons and then it occurred to me- Universa has been "bleeding losses" since inception, making them a perfect fit for Horizons. In any case, I don't believe it would be viable to charge a 1/20 management fee on ETFs that mirror HFs as fund managers are clearly disincentivized so obviously only mediocre funds would opt in for such shenanigans. Rather amusing evening, nonetheless.

What conference was this Macro?

 
May 31, 2012 - 3:53pm

I think Macro called it. I did a bit more reading, and this really looks like just another way for Universa to generate extra fees. I couldn't find anything about a 20% performance fee being necessary. But with the way the fund is structured (Horizon = investment manager, Universa = Sub-Advisor only responsible for the black swan protection), Universa might not see any fees unless the fund beats the index and triggers the performance fee.

Taleb is also not involved in any trades or specific actions of the fund, but is the "Distinguished Scientific Advisor" of Universa investments. I think much of the news focuses on him, because he provides some sort of name brand legitimacy to this fund.

This article is pretty useless, but scroll to the bottom to check out the example graph of the returns of the index, a random index fund, and one of these black swan etfs.

scroll down to see the graph

My WSO Blog "Unbelievably Believable" -- RG3
 
May 31, 2012 - 3:59pm

This sounds like a joke.

And the structure seems ridiculous, if I'm understanding it correctly: 1% if nothing catastrophic happens, and the usual 1% plus 20% if there is a catastrophic event that the fund can profit from? Or is that totally wrong?

The 1% alone, though, is unreal for an ETF.

"When I was young I thought that money was the most important thing in life; now that I am old I know that it is." - Oscar Wilde "Seriously, psychology is for those with two x chromosomes." - RagnarDanneskjold
 
Nov 29, 2012 - 6:17pm

UncleMilty:
This sounds like a joke.

And the structure seems ridiculous, if I'm understanding it correctly: 1% if nothing catastrophic happens, and the usual 1% plus 20% if there is a catastrophic event that the fund can profit from? Or is that totally wrong?

The 1% alone, though, is unreal for an ETF.

If the strategy is options tail risk (probably fairly or overpriced now but there is diversification benefit) then the gross/net returns should look something like the following

-2/-3%, -2/-3%...+50/+39%

Why is that so hard to swallow. Because the ETF only beats the hurdle occasionally, its not like you pay performance fees every year.

 
Nov 11, 2012 - 8:08am

I've had a look at Universa's performance and they haven't been "bleeding losses", in fact their funds are all positive since inception being up significantly in 2008 and up in 2011 with small losses in 2009 and so far in 2012.

 
Best Response
Nov 29, 2012 - 6:28pm

Hedge Fund investing ETF style (Originally Posted: 07/07/2012)

ETFs cover a wide range of investing ideas from mimicking an index to tracking technology trends. Now, there are two ETFs that try and mimic top hedge fund managers by looking at positions in quarterly 13F filings.

The first of these ETFs to be launched was the AlphaClone Alternative Alpha ETF which is up 4.5% YTD, but has only been out slightly over a month. AlphaClone takes an equal weighting of the positions listed in a 13F, but if a position has more than one manager it receives a second count in the portfolio. A nice feature of the AlphaClone ETF is that it will go short under certain circumstances, such as the S&P 500 crosses below its 200 day moving average.

Global X launched its own hedge fund like ETF, the Guru Holdings Index and it is up 4.1% YTD. This ETF has roughly 50 securities in its portfolio including both domestic and international.

The new ETFs might seem like a good idea, but worry that the lag between the 13F filings and when the ETF can take the position is out there. A position that a hedge fund lists on a 13F can easily be liquidated by the time the ETF has the information. Also, some of the hedge funds that the Guru ETF tries to mimic aren’t even pure long/short funds.

WSO, what are your thoughts on these new types of ETFs?

http://www.indexuniverse.com/sections/news/12058-alphaclone-debuts-hedg…
http://www.indexuniverse.com/sections/news/12108-global-x-launches-guru…
http://seekingalpha.com/article/638571-global-x-debuts-guru-etf
http://seekingalpha.com/article/674311-why-you-should-be-wary-of-the-gu…

 
Nov 29, 2012 - 6:32pm

I'm not sure about the other ETFs you mentioned but i know for a fact that the GURU ETF does not accurately replicate HF performance at all. First of all, the 13F filings which the ETFs are ‘tracking’ will not clone hedge fund performance. The filings have to be made, legally, within 45 days of the end of a quarter. Most funds wait out that entire period and file their reports on the last possible day.

That leaves the new ETF at least 45 days behind the market. Much can change in a 45 day period, and the ETF will be vulnerable to those changes. This leaves the ETF far behind both the long thought out and split second decisions made by hedge funds. It is the brain power behind these funds that lead to their success.

Hedge funds also tend to hold more than just equities in their portfolios. They hold bonds and commodities and many other types of investment. Most movements unaccounted for by the index, leading to even greater inaccuracies along with the market lag. Seth Klarman’s Baupost Group is an excellent example. It has $24 billion under management but only about $3 billion in equities.

The issue is that these funds that purport to follow the moves made by the biggest and most successful hedge funds do nothing of the sort.

Retail investors looking to mimic hedge funds may be attracted to these ETFs. Like everything else in finance, there are no promises. The design is poor, and with the Guru X following 68 funds, the cumulative disconnect between the ETF and the index it is supposed to follow is a chasm.

"Well, you know, I was a human being before I became a businessman." -- George Soros
 
Nov 29, 2012 - 6:34pm

Hedge funds' use of ETFs (Originally Posted: 10/18/2014)

I read a recent interview of Paulson where he states that his fund uses sector ETFs to hedge against long stock positions. As a lot of people know, Paulson was at one point the largest owner of the Gold ETF (GLD) and is a huge player in other ETFs as well.

Is the use of ETFs common amongst long-short and special situations hedge funds? Or is Paulson sort of an anomaly in this regard?

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