Hedge Fund Explores Fixed-Income ETFs

February 06, 2014

Hedge fund investors of all shapes and sizes making play for ETFs.

The hedge fund crowd, long revered by Wall Street investors and insiders as the “smart money,” is now making ETFs a part of their “smart money” portfolio. In fact, ETF investors can now somewhat mimic the equity portfolio of hedge fund managers such as John Paulson via the Global X Top Guru Holdings ETF (GURU | B-50) in quarterly installments.

However, Garth Friesen, principal of III Associates, an affiliate of Boca Raton, Fla.-based AVM L.P., a brokerage, trading and administrative service with $3 billion in assets under management, also wants to bring fixed-income investments in an ETF wrapper to institutional investors and eventually to the retail set.

Friesen recently spoke to ETF.com staff writer Hung Tran on the sidelines of the Inside ETFs confab, the world’s largest gathering of ETF investors and industry participants, about why he likes ETF and why he thinks the ETF market is now ripe for more alternative fixed-income offerings.

ETF.com: Would you tell us a bit of what your firm does?

Friesen: We’re an asset manager with three investment strategies: fixed-income arbitrage, long/short credit, and tail hedging and volatility strategies.

ETF.com: What do you like about ETFs, and why do you think now is the right time for alternative fixed-income ETFs?

Friesen: I love the transparency and ability to get real-time analytics in terms of the flows data and instant exposure to broad and narrow asset classes. I also love the trading costs compared to the over-the-counter market.

One of the other great features of ETFs is that, just like an equity-single-managed account, they’re not really more expensive to maintain compared to what we do on the hedge fund side, where single-managed accounts are quite expensive.

I think a more appropriate way to look at fixed income is moving away from the tendency [to consider] all fixed income is Treasurys. There are so many different subasset classes in fixed income now that can be accessed, such as the loan market, floating-rate Treasurys, municipal bonds and taxable munis.

By putting together a portfolio of some of these noncore fixed-income markets, you can reduce your exposure to the core market in the event rates do rise and at the same time get diversification benefits.

The reason we’re now starting to look at the ETF market is because you can access those subasset classes, where historically you haven’t been able to do that. So the timing is ripe to bring this to the institutional marketplace.

ETF.com: What fixed-income products are you looking to bring to market?

Friesen: We’re looking to provide some of our institutional clients, primarily pension funds, with what we think can be a better way of accessing tactical management within fixed income.

With the growth of all the different fixed-income products, overlaid with better execution in the ETF market, the total trading cost of a tactical strategy could be lower in ETFs than in traditional fixed-income markets.

Given that we’re focused on the institutional market, we’re going to be focused on ETFs with liquidity and tradability, so it’s going to be in a fund that’s scalable, where we can provide the benefits that we’re advocating in terms of lower transaction and holding cost.

We think there’s still a lot of demand for an unconstrained-bond-type of strategy and that can be developed in an ETF format. It may have to include other exchange-traded products like futures in order to bring the interest rate duration to zero or negative. We also think there’s demand for a zero-interest-rate duration product as well as low-duration funds.


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