Hedge Fund Awaits Non-Transparent Relief

February 19, 2014


ProForza Advisors, a McLean, Va.-based boutique investment advisory firm focused on serving institutional and well-heeled investors with quantitative, absolute-return-like investment strategies, wants to bring its brand of smart-beta investing to the ETF investing public.

The firm is currently looking to partner up with fund management firms such as Eaton Vance, which is currently seeking non-transparent exemptive relief, to offer investors a superior alternative to current so-called “smart beta” products, according to Sunil Pai, managing director at ProForza.

Pai recently spoke to ETF.com staff writer Hung Tran about how his firm is looking to get into the ETF space and offered his take on existing smart beta ETF products in the market.


ETF.com: When did your firm launch, and how much money do you manage?

Sunil Pai: We started in 2012 and we’re currently managing about $70 million. We have three products we offer based on the same core algorithm. One is a long/short ETF product made up of a broad basket of ETFs called the Active Risk-Based investing (ARBi) ETF. The ETF product is made up of mostly household ETFs such as the SPDR Gold Trust (GLD | A-100), the SPDR S&P 500 ETF (SPY | A-97) and the iShares Russell 2000 ETF (IWM | A-82).

We picked them because there is a tremendous amount of liquidity, capacity transparency and ability to selectively capture different forms of risks in terms of gold, major market indexes, sectors and volatility.


ETF.com: We understand that you’re interested in offering your quant strategy in an ETF wrapper. Can you tell us about that and some of the challenges you’re seeing for active managers in the space?

Pai: We want to create an ETF with our underlying quantitative strategy, and we’re in talks with some of the bigger firms about doing something along those lines. So we’re saying you can buy the iShares S&P 100 Index Fund (OEF | A-93), which is market-cap weighted, or you get our product based on the same constituents but with a different process that competes against OEF.

The current regulatory stance is that is active managers have to disclose their daily holdings to the world in an ETF wrapper. Thatdaily rebalancing we have as active managers is a significant source of our alpha.

If we had the opportunity to delay the release of that information for a week or two, then we would be able to offer our strategy in an ETF right now versus later when regulators offer some kind of exemptive relief to allow for non-daily transparency. That’s where firms like Eaton Vance has registration in place to see if they can push the Securities and Exchange Commission to allow for some sort of exemptive relief on this point.

We’re relying on firms like Eaton Vance to pull the strings to get to that place. If they can get that exemptive relief, quite a few active managers will come to the marketplace. Firms like Eaton Vance could possibly partner with us by issuing ETFs under their exemptive relief and we would provide the algorithmic process for them to be able to manage the fund.

One day we will bring our strategy to a much broader audience and ETFs is a way to do it if regulators can change its ways on this transparency issue. We have a proprietary algorithm and we don’t want to disclose it to everyone, but at the same time the average investor should be able to access us at some level.


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