Posted by on November 3, 2016 10:23 pm
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Categories: 13F Blackrock CDO Citigroup Economy goldman sachs Main Street Reuters State Street Trading Strategies

Back in February we reported that despite its abysmal forecasting track record, Goldman was preparing to launch an ETF based on its proprietary tracker of the 50 most popular hedge fund positions, the Goldman Sachs Hedge Fund VIP (known internally as the GSTHHVIP). The proposed ETF was notable because It would mark the first time a Wall Street bank uses its own research report as the basis for an ETF.

But there was just one problem: as we showed at the time, anyone who may have invested in this particular index of stocks – had the ETF been available previously – would have lost a record amount of money as a result of the spectacular collapse of “hedge fund hotel” positions in late 2015 and early 2016, which sent the index to its lowest level in history over just a few short months. 

We also speculated about the specific reason behind this particular ETF, and decided that given the dismal performance, one can only imagine that creating this ETF enables Goldman Sachs’ clients to offload huge blocks of their positions into a muppet-friendly investment vehicle that every Tom, Dick, and Day-Trader will scoop up.

We also suggested that this being Goldman – the company which brought you the Made for Shorting Abacus CDO – “the guaranteed way to make money with this ETF would be to short it.” And indeed, for months after our article, Goldman’s Hedge Fund VIP tracker continue to tumble, ultimately reaching a level just below 88 in July.

Which may explain why Goldman put its ETF plans on hold for nearly one year. However, in the late summer, the index started outperforming again, and in the latest weekly update, the hedge fund index had managed to recoup nearly half its losses from its all time high level hit in the summer of 2015.

So, now that it is back on the upswing, Goldman decided to quickly capitalize on the still rising underlying securities, and today it officially launched the long-awaited ETF.

As Reuters reports, the Goldman Sachs Hedge Industry VIP ETF (GVIP) will provide exposure to the 50 U.S. stocks that appear most frequently as top holdings in hedge fund’s quarterly 13F filings. It is the seventh ETF Goldman has launched since September 2015.

The new ETF is based on a popular research report put out by Goldman analysts Ben Snider and David Kostin in the Wall Street bank’s research division. As of August, holdings in the VIP index included Amazon.com Inc, LinkedIn Corp and Citigroup Inc, according to the bank’s research. Of course, if one doesn’t want to own the ETF, one can simply buy the consistuent stocks as laid out in the following table, updated most recently as of June 30, 2016:

Goldman isn’t the first to provide an ETFs that tries to beat the market by copying hedge fund managers’ stock picks. Other ETFs include the Global X GURU Index ETF and Alphaclone Alternative Alpha ETF.

Hedge-fund tracker ETFs are different than so-called liquid alternatives funds, which try to replicate broader trading strategies used by hedge funds. Both types of products are marketed to Main Street investors.

Since by launching the new ETFs, Goldman is entering a highly competitive $3 trillion global market dominated by the likes of BlackRock Inc, State Street Corp and Vanguard Group, which together account for about 70% of total assets globally, it will have to stand out in terms of low cost. And sure enough, the GS Hedge Industry VIP ETF is priced at 45 basis points, meaning investors will pay $45 in annual fees for every $10,000 invested. Similar funds charge between 65 to 95 basis points.

However, what this particular ETF will do is two main things: i) provide a willing buyer – and thus a liquid market – for the stocks held by most hedge funds, who will now be able to offload their exposure directly to retail investors, even as Goldman collects a piece of the pie, ii) and allow traders to indirectly short the hedge fund industry by shorting not hedge funds themselves, but their most popular holdings; the same holdings which were dumped en masse in late 2015 and early 2016 (see first chart above), when the hedge fund space was forced to liquidate their most liquid assets to satisfy a surge in redemptions which are still ongoing.

Which in retrospect, means that the new Goldman ETF will actually provide a useful function: it will part the most naive of “muppets” from their cash on short notice, and also present the broader investing public with a way to bet on the demise of the hedge fund industry by simply shorting the stocks that make it tick.

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