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Alternative Market Briefing

In the ETF era, emerging managers could stand out

Tuesday, January 09, 2018

Bailey McCann, Opalesque New York for New Managers:

According to recent data from EY, asset flows into ETFs could increase by as much as 73 percent over the next two to three years. As investors flock to these lower cost vehicles, it will become harder and harder for large hedge funds to justify their fees and lockups. Delegates at the recent Opalesque Chicago Roundtable suggest that the push into ETFs could create unexpected opportunities for emerging managers.

Scott Billington, Co-Founder, Covenant Capital Management notes that emerging managers can take advantage of micro-market opportunities created by ETFs that might otherwise be ignored by larger hedge funds. "Trading around these ETFs that have published formulaic rules that they have to follow in the exchange of their underlying instruments, whatever they might be, can be meaningful," Billington explains. "I do think that can create a number of potentially exploitable inefficiencies. And then perhaps so many people come in and try to do that that other inefficiencies appear elsewhere."

By being able to take smaller positions and react dynamically to changes in the market, emerging managers could have a leg up over larger funds, where small trades are uneconomic. Billington's view was echoed by Anthony Lombardi, Associate Partner, at consulting firm Aon Hewitt. "When we talk about managers who are looking to exploit certain......................

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