The more you look at it, the more it is about buying expertise.
The headlines yesterday were all about the Janus acquisition of VelocityShares, and for good reason—the acquisition of a small ETF provider is obviously news. We just don’t see those that often.
But I’m still a bit confused about the deal. Let’s start with some easy questions:
What Does It Mean For VelocityShares ETF Holders?
This is probably the easiest question to answer. My guess is that the sale of VelocityShares will have zero impact on shareholders, whether they hold one of VelocityShares’ ETNs, like the popular VelocityShares Daily Inverse VIX Short Term ETN (XIV), or a traditional ETF like the VelocityShares Tail Risk Hedged Large Cap ETF (TRSK | C-64).
The reason is simple—VelocityShares doesn’t “own” these products. They, like every ETF, use a trust structure that effectively “owns itself.” Each product is its own entity. The ETFs have a fund board to manage things, and the ETNs are actually debt issued by Credit Suisse. VelocityShares has contractual relationships in both cases, but it doesn’t even have the right to alter the products—that’s up to the fund boards and Credit Suisse.
Which means, barring a lot of paperwork and a lot of cooperation, the existing products will likely roll along unfettered.
What’s Janus Actually Getting?
This is the trickier one. VelocityShares is actually a collection of businesses: It has a broker dealer, it has an index calculation business, it’s certainly a marketing organization for its ETFs, and so on. But what it’s not is actually a fund manager in the traditional sense.
The ETFs are all organized under the exemptive relief of ALPS or Exchange Traded Concepts, two firms that rent out their umbrellas to small would-be ETF issuers. In the case of all but the Equal Risk Weighted Large Cap ETF (ERW | C-66), ALPS is the investment advisor, collects all the fees and is actually responsible for running the portfolio. With ERW, that’s handed off to Index Management Solutions in Philadelphia.
If all that sounds a little confusing, welcome to the fund management business. This is how it’s done.
It’s not unique to ETFs, or VelocityShares. Most mutual funds are actually “run” by an entire network of third-party service providers: custodians, subadvisors, prime brokers, fund accountants, distributors, marketing specialists, etc.
The VelocityShares setup is actually fairly clean, and clever, honestly: It lets the firm come to market with a variety of products in a short amount of time, and focuses on providing the intellectual capital behind the launches and the marketing and distribution support to get the products out there and known.
That’s what Janus is really buying. Expertise.
Didn’t Janus Already File?
Indeed they did. Back in 2010, Janus filed for broad exemptive relief to run actively managed ETFs. It was the most vanilla version of the filing you can do—it excluded derivatives, it disclosed holdings and other info. In that respect, it was very similar to the PIMCO filings of the same era. While Janus has been mum about its ETF plans so far, I find it nearly inconceivable that it has not been granted this exemptive relief already.
But there’s a very big difference between being allowed to do something by the regulators and actually having any clue how to do it. Janus knows how to run mutual funds—it has fund boards, trading desks, fund accountants and all that jazz. But ETFs are the quintessential horse of a different color.
It’s Gotta Be About The People
So if Janus doesn’t need (and isn’t getting) exemptive relief out of this deal, what’s really at stake here? It’s pretty unlikely that VelocityShares revenue moves the needle on Janus income statement. It’s also pretty unlikely Janus has decided volatility-based products are the future of investment management.
In my mind, what this has to be about is the people.
Some of that’s internal: Nick Cherney and Rich Hoge at VelocityShares are smart, well-connected folks. They are the classic “wouldn’t bet against ’em” team, with a real passion for this business. They’ve developed a network of relationships that’s probably a lot more valuable than any piece of paper from the SEC. Those relationships—with advisors, capital markets teams, hedge funds, broker-dealers, market makers and APs—are not as easy to acquire as you might think.
If I had to make a guess, the real acquisition here isn’t a firm, it’s a team.
Consider that just this year, Janus has hired or bought:
- Myron Scholes, Nobel-winning economist
- Bill Gross, arguably the best bond manager in the world
- VelocityShares, one of the upstart innovators in ETFs
Add to that that Janus owns quant-based “smart beta” manager InTech, and honestly, I have no idea what you actually do with that team. But I’m not sure I’d bet against any of them individually, and I sure as heck wouldn’t bet against them in some kind of Powermaster Optimus Prime Janus Transformer configuration.
At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected] or on Twitter @DaveNadig.