Blue Tractor Group (Blue Tractor) has filed a third amended application with the US Securities and Exchange Commission (SEC) for a new fund structure called a ‘Shielded Alpha ETF’.
Curious about the company name?? Terry Norman conceived the core concepts underpinning the Shielded Alpha ETF structure while riding his blue tractor (pictured) on his farm outside of London.
The proposed structure is an extension of a traditional actively managed ETF that does not require full portfolio disclosure on a daily basis in order to facilitate pricing, hedging and arbitrage. Consequently, Shielded Alpha ETFs allow active managers to fully obscure their proprietary alpha generation strategy from the market.
At no point are the ETF’s precise portfolio holdings known to anyone except for the managers and custodian, preventing reverse engineering of the fund; however, more than 90% of the ETF’s composition will be visible at any one point, allowing greater insight into the thematic approach adopted by the managers.
Terry Norman, founder of Blue Tractor and the originator of the algorithms underpinning the Shielded Alpha ETF structure, commented: “We have spent months dialoguing with authorized participant firms and exchange market makers, leading custodial banks and distributors and asset managers and believe the amended structure as described in our application successfully addresses the needs of investors and issuers for a product that can deliver the attributes of active management with the cost and tax efficiencies of an ETF wrapper.”
Simon Goulet, co-founder of Blue Tractor, added: “We are buoyed by the positive feedback we’ve received from the market regarding our ETF structure and look forward to continued constructive discussions with the SEC.”
Blue Tractor filed its initial application with the SEC for the approval of the Shielded Alpha ETF structure in March 2016. The company hopes to enter into licensing agreements with unrelated investment advisers that could utilize the Shielded Alpha solution for their own Shielded Alpha ETFs.
Previous propositions by others to the SEC for a new actively-managed ETF structure have generally included the concept that a third party would disseminate an intraday indicative value (IIV) based upon either a ‘proxy’ portfolio that mimics the abstract statistical risk profile of the unknown underlying portfolio, or actual portfolio holdings if the third party has been granted privileged access to view the underlying constituents. This approach is 100% non-transparent and consequently daily arbitrage, hedging and in-kind creation and redemption in the primary market by authorized participants and market makers will take place, respectively, without any portfolio knowledge.
In contrast, according to the group’s initial application, a Shielded Alpha ETF calculates and disseminates the fund’s IIV frequently throughout the day, based upon a dynamic stock specific risk portfolio (Dynamic SSR portfolio). The Dynamic SSR portfolio is not a ‘proxy’ portfolio as it will always have at least 90% overlap with the unknown underlying portfolio, compared to statistical proxies which may have minimal overlap. The Dynamic SSR is able to incorporate the effects of exogenous events throughout the day, allowing for better tracking of portfolio price changes under varying market volatility conditions.
Derivative to the Dynamic SSR portfolio are proprietary algorithms that construct a hedge portfolio (a subset of the Dynamic SSR portfolio), associated in-kind creation and redemption baskets and metrics akin to value at risk (VaR) that signal arbitrage opportunity, thereby providing participants in the primary market with tools to reduce trading risk, adjust ETF inventory and keep the ETF market price close to the underlying portfolio net asset value (NAV) for the benefit of investors in the secondary market.