New ETF Firm Gencap Buys FactorShares By Olly Ludwig
July 16, 2012
FactorShares, the ETF sponsor behind a quintet of leveraged spread funds and a trio of resource-focused equity funds now in registration, was acquired by a new white-label exchange-traded fund company that aims to help clients bring to market just about any sort of ETF imaginable. Terms werenĂ˘â‚¬â„˘t disclosed.
GencapVentures LLCĂ˘â‚¬â€ťa new firm headed by former MacroMarkets Chief Executive Sam Masucci, and involving a number of ETF industry veteransĂ˘â‚¬â€ťplans to help clients bring funds to market under the Securities Act of 1933 and the Investment Company Act of 1940, including both passively and actively managed ’40 Act ETFs. Gencap might even help clients launch ETNs.
At first blush, New York-based Gencap looks a lot like Oklahoma City-based Exchange Traded Concepts or Bethesda, Md.-based AdvisorShares in that the new firm aims to help others bring ETFs to market, as do ETC and AdvisorShares. But the breadth of what Gencap plans to offer may put it in a class by itselfĂ˘â‚¬â€ťsomething Masucci stressed in a telephone interview and an email exchange with IndexUniverse.Ă‚Â Masucci’s account was confirmed by other individuals familiar with the matter who spoke to IndexUniverse on condition of anonymity.
Ă˘â‚¬Ĺ“For any investment manager that wants to get into the space and doesnĂ˘â‚¬â„˘t want to spend a few million bucks and wait three years to get involved, weĂ˘â‚¬â„˘re going to build the necessary infrastructure and have it all available for them,Ă˘â‚¬Âť Masucci said.
Ă˘â‚¬Ĺ“We are building the most complete and comprehensive ETF product and services platform,Ă˘â‚¬Âť he added.
Business plans like Gencap’s, ETCĂ˘â‚¬â„˘s and AdvisorSharesĂ˘â‚¬â„˘ hint at what the future of the ETF industry may look like. With nearly 1,500 U.S.-listed ETFs with almost $1.2 trillion in assets now competing for advisorsĂ˘â‚¬â„˘ and investorsĂ˘â‚¬â„˘ attention, the days of easily rolling out funds may be over. Instead, marketing funds may now require much more strategic and logistical forethought before launch, and firms such as Gencap Ă‚Â are ready to provide such services.
That new reality may well be on the front burner given the volatile swings in the markets and the weak and uneven economic recovery, which has arguably caused a slowdown in ETF launches in the past few months and probably even helped doom a number of seemingly interesting ETFs to closure. In short, investors and fund sponsors seem to be hunkering down in hopes the recovery becomes smoother.
Masucci said his firm will be compensated with a combination of a flat fee for its services, and will also receive an undisclosed ongoing stream of pay linked to expense ratios of funds it helps bring to market.
Gencap is expected to put out a press release on Tuesday morning detailing the FactorShares transaction and Gencap’s business plan.
Gencap will use the regulatory permission that FactorShares already has to market both Ă˘â‚¬â„˘33 Act funds and passively managed Ă˘â‚¬â„˘40 Act funds. An entity related to Gencap,Ă‚Â Active Relief LLC, also recently filed a regulatory petition to obtain permission to market actively managed Ă˘â‚¬â„˘40 Act funds, Masucci said.
Using pre-existing Ă˘â‚¬Ĺ“exemptive reliefĂ˘â‚¬Âť makes Gencap seem particularly similar to Exchange Traded Concepts, which rose from the ashes of FaithShares, an ETF company that never really got much traction marketing index funds that screened securities for various Christian ethical and moral values.
ETC began its journey using FaithSharesĂ˘â‚¬â„˘ exemptive relief, and is headed by the same CEO, Garrett Stevens. One of the three funds ETC has brought to market so far, the Yorkville High Income MLP ETF (NYSEArca: YMLP) has gathered $44.2 million in assets, according to data compiled by IndexUniverse. ThatĂ˘â‚¬â„˘s a sum that might constitute a Ă˘â‚¬Ĺ“proof of conceptĂ˘â‚¬Âť for ETCĂ˘â‚¬â„˘s Ă˘â‚¬Ĺ“ETF-In-A-Box solutionĂ˘â‚¬Âť service.
While Exchange Traded Concepts has also applied for exemptive relief to market active ETFsĂ˘â‚¬â€ť a pocket of the ETF world AdvisorShares is exclusively focused onĂ˘â‚¬â€ťGencap Ă‚Â appears to have an edge over its two competitors as it relates to Ă˘â‚¬â„˘33 Act funds and, by extension, the world of futures-based ETFs.
Futures-based ETFs are a fast-growing piece of the ETF world that has gathered more than $106 billion, or almost 9 percent, of all ETF assets, according to data compiled by IndexUniverse.
Futures investing owes much of its development to academic work done by two Yale scholars, Geert Rouwenhorst and Gary Gorton, who argued in a 2005 paper that commodities were a bona fide asset class with returns that are negatively correlated with those of stocks and bonds.
The ETF wrapper has helped speed that development, as the success of securities such as the multicommodity PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) clearly demonstrate. DBC has $5.89 billion in assets, according to data compiled by IndexUniverse.
More relevant to Gencap’s plans, futures investing is generally not as well understood among investors and advisors as is the world of plain-vanilla Ă˘â‚¬â„˘40 Act funds. Also, Ă˘â‚¬â„˘33 Act funds involve an extra regulatory step involving the exchanges asking for permission from the Securities and Exchange Commission to allow a specific Ă˘â‚¬â„˘33 Act fund to trade.
Apart from dealing with the SEC, Gencap is gearing up to represent clients’ needs with other regulatory bodies as well, including the Commodity Futures Trading Commission, FINRA and the National Futures Association.
Ă˘â‚¬Ĺ“We are all very experienced in dealing with the various regulatory areas,Ă˘â‚¬Âť Masucci said, singling out the Ă˘â‚¬Ĺ“19b-4Ă˘â‚¬Âť permission that exchanges must obtain from the SEC before a fund can trade.
Fund sponsors of futures-based funds say getting 19b-4 applications approved is the most onerous regulatory hurdle at the SEC, bar none.
An Experienced Cast Of Characters
To pull off everything Masucci says he is promising, he is surrounding himself with a number of ETF industry veterans, including Bob Tull, the chief operating officer at both FactorShares and MacroMarkets, who will assume the same title at Gencap . Tull will focus on product development.
Additionally, John Flanagan, who served as a tax consultant for FactorShares and also as chief financial officer for MacroMarkets, will join Gencap to head up tax-related matters, including generating in-house Ă˘â‚¬Ĺ“K-1Ă˘â‚¬Âť tax forms that are required for futures-based investments.
Additionally, Mark Esposito, the CEO of Dallas-based trading firm Esposito Global, will be part of the project as well.
EspositoĂ˘â‚¬â„˘s firm will be retained to perform various functions, including fund distribution, subadvisory work on funds, index replication on Ă˘â‚¬â„˘40 Act funds andĂ˘â‚¬â€ťin addition to Interactive BrokersĂ˘â‚¬â€ťeven portfolio management on Ă˘â‚¬â„˘33 Act futures-based funds, Masucci said.
MacroMarkets is now dormant, Masucci said, but he said the capabilities the firm had in bringing to market strategies that couldnĂ˘â‚¬â„˘t work in Ă˘â‚¬â„˘33 Act of Ă˘â‚¬â„˘40 Act wrappersĂ˘â‚¬â€ťsuch as investments focused on housing or, say, GDP growthĂ˘â‚¬â€ťwill be brought to bear if necessary.