Nancy Davis rode the boom in prop trading at Goldman Sachs Group Inc. until the financial crisis hit. A decade later, she’s pivoting from hedge funds to the red-hot ETF industry, as shifting investor appetite changes the game for fast-money traders.
The founder of Quadratic Capital Management LLC, which specializes in options-based macro strategies, is listing her first ETF on Tuesday -- as active managers battle pressures on fees and costs and struggle to outperform passive peers.
Davis is putting one of her hedge fund’s key strategies to the test with the Quadratic Interest Rate Volatility and Inflation Hedge product, or IVOL, which aims to protect against rising long-term interest rates using bonds and derivatives.
The Connecticut-based manager has few illusions about the winds of change blowing through the global investment industry. Traders have pulled more money from hedge funds than they’ve added for the past four quarters, while ETFs reeled in $312 billion last year.
“We really want to ETF the whole business,” said Davis, whose fund oversaw $171 million at the end of March. “I see this as a better technology to deliver the exact same strategy to our clients.”
It’s a propitious time to make the move, with hedge fund closures outnumbering startups for the fourth year running, according to data provided by Eurekahedge. ETF issuers meanwhile are projected to hold more than $7 trillion by 2021, according to PricewaterhouseCoopers.
AQR Capital Management and Mark Yusko’s Morgan Creek are among prominent managers who have taken steps toward starting ETFs in recent years. Dallas-based Highland Capital Management, which specializes in credit strategies, is behind a $332 million senior loan ETF.
Davis, who started the firm in 2013 after stints in Goldman’s proprietary trading group and AllianceBernstein, led a reorganization of Quadratic last year. She bought out seed investor Cowen Group Inc. and split the firm’s macro strategy into three portfolios -- fixed income, equities and commodities.
Re-Tool
At around the same time she got the idea to re-tool the inflation-hedging portfolio as an ETF, Davis said. After returning the capital invested in that strategy, she says she hopes investors will follow her into IVOL.