Redwood launches active ETF exploiting behavioural biases

Jan 19th, 2018 | By | Category: Equities

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Toronto-based Redwood Asset Management has launched the Redwood Behavioural Opportunities Fund (BHAV CN) on Aequitas NEO Exchange in Canada, an actively managed strategy that seeks to identify and profit from irrational, emotionally driven investor decisions.

Peter Shippen, president and chief executive officer of Redwood Asset Management.

Peter Shippen, president and chief executive officer of Redwood Asset Management.

The fund aims to generate long-term capital growth by investing predominantly in equity securities of North-American companies.

It deploys multiple strategies, each researched and designed to take advantage of either an investor behavioural bias/weakness or structural inefficiency in the market.

“This unique fund – the first of its kind in Canada – represents an important new frontier for investors,” said Peter Shippen, president and chief executive officer of Redwood Asset Management.

“While the study of behavioural finance is not new, Canadians have until this point not had a widely accessible vehicle to capitalize on the collective effects of investors’ emotional mistakes. The launch of Redwood Behavioural Opportunities Fund marks yet another essential step forward in the long-term evolution of our business, and in our view, is a meaningful way to help our clients achieve their goals.”

Craig Basinger, chief investment officer at Connected Wealth, the sub-advisor to the fund, added, “Investors’ emotional mistakes are potentially one of the greatest sources of mispriced assets in the market, and this actively managed, multi-approach strategy is a logical way to target – and profit from –  the behaviours that cause the mispricing.”

The portfolio is tilted to long equity holdings, but can participate in short selling up to 20% of NAV. Options can be used to implement strategies or for hedging purposes.

As of launch, the ETF’s core allocations were to ETFs providing broad exposure to Canadian and US equities – the iShares Core S&P/TSX Capped Composite Index ETF (35.6%) and the SPDR S&P 500 ETF (29.2%). The rest of the fund’s exposure is made up of approximately equally allocations to 13 stocks which the managers have selected as potentially mispriced.

The fund has a management fee of 1.00%.

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