Wrapping Alternatives Inside ETFs

Kurt Nye is Managing Partner and Chief Investment Officer at MAI Capital Management, registered investment advisory firm with $35 billion under management. Nye joined MAI in 2007 and launched the firm’s alternative investments department.

Jeff Benjamin: What are you seeing in the way of investment opportunities in the alternatives space?

Kurt Nye: With the benefit of our scale and network, we’re seeing more opportunities to invest in alternatives than we ever have, and those opportunities run the gamut from traditional closed-end drawdown structures to liquid opportunities. The highly visible success that large asset managers have had raising funds from predominantly individual investors has demonstrated the viability of such an approach and served to increase the investable universe for that segment of the market.

JB: Are you finding what you’re looking for among ETFs?

KN: There has been tremendous innovation in the ETF space, with several issuers finding ways to provide alternative risk premia via an ETF wrapper or drive for better capital efficiency by incorporating derivatives. So, while I would say that ETFs are an important part of our overall investment program across all major asset classes, alternatives are one area that we’re actively monitoring to source new solutions both inside of an ETF wrapper and in more traditional vehicles.

JB: Where do you see opportunities for issuers to offer alternatives in ETFs?

KN: In the private markets, we invest in a broad spectrum of alternative assets. As we evaluate opportunities from illiquid to liquid, we generally see a watering down of the exposure that we originally found attractive. There may be an opportunity for ETF issuers to provide an exposure that is closer in economic substance to the private markets.

JB: What are the obstacles to getting more private investments inside the ETF wrapper?

KN: There are some well-known structural challenges. First, dealing with the mismatch between the liquidity of the assets and the ETF itself. Second, establishing a real-time market value on the assets to inform the ETF’s NAV. What we’ve seen are generally only partial mitigants to these issues. It will be important to see how these new structures perform across a full economic cycle and in market dislocations. What happens to the NAV calculation? What happens to the bid-ask? Time will tell. 

JB: Why is now a good time to invest in alts?

KN: The alternative investment universe encompasses such a wide range of assets and strategies that it would be unusual if there wasn’t an opportunity somewhere. Right now, we’re seeing interesting opportunities caused by issues in the real estate market. The sheer volume of capital that is required to support the growth in AI is another area that is creating opportunities. Finally, we are interested in investments that could benefit from the continued growth in private markets.