How a hedge fund became an ETF

Darren Sinden

According to data from the FT flows into ETFs surged by a record 14.50% in November 2020, taking net inflows into the sector to $659.30 billion over the first 11 months of the year

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Hedge funds have been having a tough time in recent years. Their performance has often been lacklustre when compared to market benchmarks and indices and their fee structures are under near-constant pressure, thanks to the growth of low-cost passive investment strategies and in particular ETFs.

According to data from the Financial Times flows, into ETFs surged by a record 14.50% in November 2020, taking net inflows into the sector to $659.30 billion over the first 11 months of the year. That figure surpassed the previous full-year record of $654.0 billion seen in 2017, while a report from ETF.com shows that a further $16.80 billion flowed into US-listed ETFs in the first week of the New Year.

In terms of performance, fund of hedge funds manager Arum has calculated that the hedge fund industry returned an average of 3.43% in December. Whilst for 2020 that figure was 9.32%.

In normal circumstances, those performance figures might be thought of as creditable. However, these are not normal times and investors could have made far bigger returns elsewhere. For example, the Nasdaq 100 index was up 47.60% during 2020.

Against that background then it’s interesting to note that a small US hedge fund has undergone a transformation and turned itself into an ETF.

Fund manager Upholdings Funds LLC has converted a technology-focused portfolio that it manages, into an exchange-traded fund.

The new fund is the Upholdings Compound Kings ETF which has the ticker KNGS. This is the first time that a hedge fund has been transformed into an ETF.

Upholdings was keen to expand the investors base of their tech fund, which they launched back in 2019. They started to explore the possibility of transforming it into an ETF in March last year and filed formal plans for the switch, with the SEC in October 2020.

Unlike many ETFs, the fund will remain actively managed, and in a year that’s been tipped as being tailor-made for stock pickers that may be to its advantage.

The act of converting into an ETF is no guarantee of success on its own. As the FT also reports that one in 20 ETFs were closed in 2020 having failed to build sufficient scale.

Globally 297 ETFs were shuttered last year. That represents a closure rate of 5.50%, up from comparable rates of 4.30% in 2019 and 3.50% in 2018.

Despite those closures competition for assets remained fiercely contested and there were 318 new ETF launches in 2020.

ETFs are not exempt from competition from other products. Stock baskets and specialist indices are becoming both more common palace and more popular. For example, CMC Markets has created more than 20 thematic share baskets for its clients to trade on.

The emergence of fractional share trading is likely to bring about the ability for traders to build personalised indices and baskets in the near future, and that could create a whole a new wave of tradable products aimed at both professionals and retail investors alike.

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