The idea is to bring the institutional model down to a level where everyday investors would be able to access his strategies so that "people like my mom can invest in what we do, whereas she was never allowed to before," Yusko said.
Tax efficiency and lower cost are two key attributes that make the funds more attractive to retail investors.
Necessary Compromises
Still, hedge fund managers moving to an ETF structure may have to compromise on some of their strategies. Regulators have loosened rules governing ETF investments, but there are still constraints on how they can use leverage or invest in certain derivatives, illiquid securities and private investments.
Yusko noted, for example, that an ETF would not be able to invest directly in privately offered securities. It would have to approach that market through a proxy, such as a master limited partnership.
For some hedge fund managers, one more piece must fall into place before they move into ETFs. They must get SEC permission to shield their holdings and strategies from daily disclosures.
Hedge funds often use illiquid securities that are hard to value on a daily basis, often valued at the discretion of a fund manager. Publicly traded ETFs must disclose their contents daily.
Using only part of a true private fund strategy could create a divergence in performance, Shearman said.
"Ninety-nine out of 100 times, you lose something––something that can't be done in that (ETF) wrapper," Shearman said, referring to parts of the overall hedge fund strategy that cannot be replicated in an ETF.
The Wait For Non -Transparent ETFs
Several large asset managers, including BlackRock, State Street and Eaton Vance have asked the SEC to let them market actively managed ETFs that would report holdings quarterly instead of daily. Some in the industry say the proposals may be approved later this year or early next year.