Behold The ETF That Tracks The “Best” Active Traders

The new fund will be launched by CoalFace Capital in 2016 and pays traders for successful outcomes

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Exchange traded fund (ETF) investors may think they have heard it all when it comes to investment ideas, but the planned launch of an ETF that tracks the best traders may be a new opportunity.

Now Declan McEvoy, the chief executive of newly-launched asset manager CoalFace Capital, is working to compile a database of traders and their activity from a few main platforms, with the aim to compiling a list of the best traders for an alternative ETF.

"I guess that the return and performance in that space [actively managed hedge funds] has been pretty mediocre at best, so a product that can deliver decent returns in the macro space of the good old days – like 20, 30, or 40 percent – would be of huge interest to investors," he said. "This is also a novel approach as most ETF issuers try to sell you an investment process. We are focused on the outcome of the trade, and as long as the traders are delivering returns."

CoalFace works with four broker platforms – FXCM, CMC Markets, ADS Securities and FxPro – and one or two more might be added in the next few months. There's no limit as to how many traders CoalFace will track, said McEvoy – the universe could be around 10,000 – but the best 300 or so will be used to compile an index that will be tracked by a physically replicated ETF.

"The best traders have different properties to "the top" traders," explained McEvoy. "The best traders probably make returns very consistently every month and they have higher returns and lower volatility."

CoalFace has permission to download traders' daily data from their trading platform. CoalFace uses proprietary tools to analyse the trading data and gives feedback on a monthly basis, for example looking out for positions that are highly correlated.

Like hedge funds pay performance bonuses to managers, CoalFace then pays the successful traders based on two things – how actively they trade and where they rank on its risk-adjusted performance league table. The top traders get paid most of the performance money and it is "skewed to encourage people to perform as best they can", according to McEvoy.

McEvoy said the ETF will have annual fees of around 1.25 percent, and McEvoy said the firm can afford to pay traders without raising investor fees as the platforms pay CoalFace to introduce brokers to their services.

Plans to list and launch the index and ETF are currently being reviewed by the Financial Conduct Authority.

A similar idea came from Source, who launched two actively managed ETFs in 2013 that offer exposure to the "best broker tips" in Europe and Asia. The Source Man GLG Continental Europe Plus UCITS ETF and the Source Man GLG Asia Plus UCITS ETF provide access to an active strategy run by Man Systematic Strategies.

Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.