Patti: Volatility Proves Hedge Fund ETFs Work

April 30, 2013

IU: In general, how’s business?

Patti: Very good. We had a terrific fourth quarter and we had a better first quarter. The products are performing very well, and the asset flows are coming in.

IU: What are total assets under management in your ETFs right now?

Patti: Just under $750 million.

IU: Is that where you expected to be at this time?

Patti: Yes; we are on plan and where we expect to be. Let’s put it this way: If you look at the mutual fund marketplace, around 30 percent of that is indexed at this point. The hedge fund marketplace looks very similar to the mutual fund marketplace in terms of number of funds, not in terms of total AUM. There are around 10,000 hedge funds and there are 10,000 mutual funds out there.

We believe some significant portion of the hedge fund market will be indexed just like it has been in the mutual fund market, because the same premise, the same strength of indexing comes through regardless of the wrapper.

We want to offer products that become the S&P 500 and other benchmarks for the hedge fund market. We think the asset opportunity is very significant. We have the track record. Now we’re building out our distribution capabilities to drive awareness in the investment community.

IU: What hurdles do you face in conveying what these products do?

Patti: Well, in terms of hedge fund replication, early on, people said you couldn’t replicate hedge funds. The challenge has been first to educate investors on the benefits of the replication approach, then of course prove to them that it does work, and in fact it has done exactly what we said it would do.

The last few years the market have been very volatile, and it’s been really a perfect testing ground for these types of strategies. If you look at them, they’ve performed beautifully in a very tough environment.

IU: You originally began as an indexing firm?

Patti: Yes; we spent the first few years of our life specifically building out our indexes. We’re a little bit of an odd bird in the ETF market, because at the heart of what we do is research. We pride ourselves on the quality of our strategies.

IU: And when it comes to your indexing business, I assume you license your indexes?

Patti: We do in a select way.

IU: So it’s not a key portion of your revenue?

Patti: No, it’s not a key part of our revenue, nor is it part of our strategy.

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