An Invisible Secondary Market In ETFs?

July 24, 2009

With the shift of a huge hedge fund's positions out of GLD, our research director wonders if more managers might try the same trick.


The big headline in the last few weeks for gold bugs was that David Einhorn’s Greenlight hedge funds had moved out of their enormous $390 million position in the SPDR Gold Shares exchange-traded fund in favor of gold bars sitting in a dusty vault.

Dave NadigIs this an indictment of the ETF (NYSE Arca: GLD)? Or, is Einhorn just the smartest guy in the room (again)?

The fact that big hedge funds, like Einhorn’s Greenlight, use ETFs is certainly not news. And, of course, we know exactly how much most hedge funds use them.

Gaining Some Insight

Every 45 days after the end of every quarter, investment managers are required to disclose some of their holdings in certain securities through 13F filings with the Securities and Exchange Commission.

These filings are one of the only windows we get into the closed-door world of hedge funds, and they can often be quite revealing. (Tom Anderson did a great rundown on ETFs in 13F filings last year, which is must reading.)

One of the things we learned in the most recent round of filings (in May, for the quarter ended March 31), was just how much gold the big boys had.

The big holder was Paulson & Co., the fund run by billionaire John Paulson. We found out he had more than 8% of GLD’s shares outstanding, or nearly $3 billion.

On reading this, my colleague Matt Hougan declared GLD a rip-off; not because it’s priced too high, but simply because he believes it could charge so much less. After all, does it really cost anyone $11 million a year to keep an eye on the vault with Paulson’s share of GLD?

Cost Savings & More

For most of us, GLD’s 40 basis points is an easy cost to bear; because we’re not buying billions, we’re buying small amounts, where physical bullion would kind of be a pain.

Well, it looks like Paulson’s virtual brother, Einhorn, had enough. In his letter to shareholders (conveniently archived at, the firm said:

“First, after extensive investigation we switched our entire GLD exchange-traded fund position into physical gold. At a minimum this will provide some savings as the costs of storing gold are less than the fees on GLD. It also gives David’s desk a lot more “bling” (actually it is being held at a professional storage facility).”

That’s what made the headlines, of course. The reasons for the move are obvious (and well covered at—Greenlight could be saving on the order of $750,000 a year in fees.

Reading Between The Lines

But what’s interesting to me is his choice of the word “switched” in his statement. He didn’t say they’d SOLD their position, and indeed, they would have been foolhardy to do so.

Despite the near-constant chatter of conspiracy theorists who believe there is no actual gold in GLD, the procedures for making a giant redemption are quite clear.

Every authorized participant in GLD has their own account at HSBC, the custodian for GLD. When they want to redeem or create shares, HSBC moves accounting entries around between the AP account and the GLD account. And yes, when a giant redemption happens, all HSBC has to do is make an allocation of physical gold in the vault from column A to column B.

It’s all in the prospectus, of course.

This is nearly certainly what happened with Einhorn’s $390 million worth of GLD.

Consider his alternative. He could have dumped his shares on the open market, forcing an AP to pick up the shares and redeem on their own account—likely making a large hedge bet that same day so they didn’t end up stuck with $390 million in overnight exposure to gold.

Then, Einhorn would have had to hop into the bullion market and buy it all back up.

Instead, I suspect he’s used GLD as a rather efficient accumulation vehicle, letting him get all the gold exposure he wants over time, and then just magically flipping it into a physical holding that he will no longer have to disclose in 13F filings.

Here’s what I’m going to be looking at when we get the next batch of 13F filings in August: What other markets are there where ETFs may be acting as convenient accumulation (i.e., in-kind) engines?

Is there a game being played with CFTC position limits here, where big players can accumulate/redeem/create/liquidate their way around what might otherwise be embarrassingly transparent interactions?

I’m certainly not sure. I’m just suggesting that ETFs might be providing a kind of time-delayed exchange for underlying securities not enough people have considered before.

Dave Nadig is research director at He welcomes comments and suggestions for future columns at: [email protected].


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