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After years of slowly losing ground in the ETF industry it pioneered, State Street appears to be betting that it can claw back investment management market share with a tilt towards alternatives and partnerships.
Last week Apollo and State Street announced that they were launching a (quasi-)private credit ETF, and then three crypto/crypto-adjacent ETFs with Galaxy Asset Management. Today, State Street said it was doing something similar with hedge funds.
The Global Alternative Beta Fund won’t actually be an ETF, but it will be a passive, daily-liquidity fund that seeks to replicate HFR’s Global Hedge Fund Index. From the press release:
State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT) has announced the launch of the State Street Global Alternative Beta Fund, which seeks to approximate the returns of hedge funds as a broad asset class.
The State Street Global Alternative Beta Fund is managed in reference to the HFRX Global Hedge Fund Index (“the Index”), provided by HFR. The Index represents a broad range of hedge fund strategies including equity hedge, event driven, macro/commodity trading advisor and relative value arbitrage. It is a widely recognized benchmark for hedge funds and is representative of the asset class.
HFR’s indices of hedge fund returns are pretty popular, but there’s almost no detail on exactly how the fund will mimic its flagship index.
Nor does there seem to be any US regulatory filing which might have yielded more details (the press release only says that it’s been registered in the UK, Ireland, Netherlands, Luxembourg, Sweden, Finland, Norway and Denmark, and been seeded with £123mn from Quilter Investors).
The press release touts State Street Global Advisors’ “unique replication methodology that captures the essence of the alternatives universe with minimal complexity”, but the below is the closest we get to an explanation (our emphasis):
The State Street Global Alternative Beta Fund aims to approximate hedge funds’ beta returns driven, to a large extent, by various market exposures and approximate the risk-return profile of the asset class through a dynamic, factor-based investment process. The strategy aims to determine which market factors have been driving hedge fund returns recently and dynamically replicates those exposures. This strategy increases liquidity relative to directly investing in hedge funds, and by replicating hedge fund beta returns through a systematic process, costs are reduced.
In other words, it seems SSGA is going to cobble together a quasi-hedge fund replicating passive mutual fund from an assortment of other underlying factor strategies that it already manages, and only sell it in Europe.
This is a lot less ambitious than the JV with Apollo, where the press release featured quotes from both State Street’s Ron O’Hanley and Apollo’s Marc Rowan. Razzmatazz like that matters.
Moreover, packaging up hedge fund strategies in mutual fund and ETF formats isn’t new. “Liquid alternatives” have been a thing for a while now. For example, the iMGP DBi Managed Futures Strategy ETF that mimics CTAs now has assets of over $1bn.
State Street’s new “Global Alternative Beta Fund” IS different, in that it will attempt to replicate the hedge fund industry’s overall average returns, rather replicating a specific hedge fund strategy. But the problem is that average hedge fund returns are, well, pretty average. The HFRX index’s 10-year annualised return is just 1.62 per cent.
The ETF world is also churning out a staggering number of new funds, many of which look far more like hedge funds than anything else. ETFGI says that the number of new ETFs that have launched this year has hit 1,192, a new record for the first eight months of the year.
Of these recent fund launches, the SPDR SSGA Apollo IG Public and Private Credit ETF still looks the most intriguing. Morningstar wrote a really good report on the proposal here, but hopefully FTAV will share some of our own thoughts before the end of the week.
After all, we have some heretical thoughts on ETFs and illiquid assets . . .