When Maz Jadallah wanted to monetize his hedge fund position replication index by offering it as an exchange-traded fund, he sought help from what seems like an unusual place––the International Securities Exchange.
Based in New York City, ISE was the first all-electronic options exchange in the U.S. and now is the nation’s second-largest equity options exchange. While it generally hasn’t been known as a go-to place for anything ETF-related, ISE is no stranger to the ETF world. Its business development team has built more than 30 proprietary indexes that are tracked by 20 exchange-traded products from the likes of First Trust, Direxion and UBS.
Jadallah, founder and CEO of AlphaClone LLC, and ISE last May teamed up to roll out the AlphaClone Alternative Alpha ETF (ALFA), which tracks the AlphaClone Hedge Fund Long/Short Index. AlphaClone’s research focuses on combing through quarterly 13F public filings that disclose recently-reported holdings of hedge funds and institutional investors. The company’s index is based on a proprietary methodology that identifies high-conviction holdings of hedge funds it deems most worthy to follow.
“ISE is a well-established options exchange owned by Deutsche Börse that has deep pockets and credibility on Wall Street,” says Jadallah, explaining why he partnered with ISE on his ETF. “That gives the fund credibility with institutional investors.”
ISE’s partnership with San Francisco-based AlphaClone was the first in which it took an active role in bringing an ETP to market beyond simply creating an index that can be tracked. In January, ISE formally proclaimed its ETF ambitions when it announced that its product development group will now be known as ISE ETF Ventures, and that the group is going beyond index development to offer a range of financial, marketing and logistical assistance to create what it feels are innovative ETPs.
“We’re putting our money where our mouth is by putting our capital to work to create new products,” says Kris Monaco, head of ISE ETF Ventures. Regarding the AlphaClone ETF, he says ISE provided capital to launch and maintain the fund, in addition to providing marketing help.
The ALFA fund’s underlying index holds roughly 75 positions, and can adjust its outlook from being long-only during strong bull markets to being hedged at 50 percent long/50 percent short the S&P 500 Index during multi-month bear markets. The index is equal weighted but has an overlap bias that can give a constituent held by twice the number of managers twice the weight.
The fund’s average daily trading volume remains light, but it has attracted $10.7 million in assets and has gained nearly 23 percent in its first 10 months. Its expense ratio is 95 basis points.
Connections
ISE sees itself as a place where fund ideas can become reality. “Being an exchange, we have a unique position in the marketplace to share information that matches participants with each other and brings new products to market,” Monaco says.
Jadallah was introduced to Monaco by Garrett Stevens of Exchange Traded Concepts LLC, an outfit that helps bring ETFs to market and is the investment advisor for the ALFA fund. “He [Stevens] knew Kris was looking for innovative ideas,” Jadallah says.
Likewise, when PureFunds wanted to create natural resources-based ETFs, industry contacts put company CEO Paul Zimnisky in touch with Monaco and ISE. “It came down to us both having similar ambitions to launch niche natural resource products not yet covered by ETFs,” Zimnisky says.