Noah Hamman is chief executive officer of AdvisorShares Investments LLC, a Washington, D.C.-based exchange-traded funds provider. Before starting the firm in late 2006, he was vice president of business development at Rydex Investments.
The start-up company recently sold a 60% stake to Fund.com, a New York-based over-the-counter public asset manager and educational content provider. It trades with the ticker symbol of OTCPK:FNDM. IndexUniverse's Managing Editor Murray Coleman recently caught up with Hamman to discuss events surrounding his company and active ETFs.
IndexUniverse [IU]: Why did you sell a majority interest in AdvisorShares?
Hamman: There were two reasons. One was to find a financial partner for the business. Fund.com is also relatively new, but they're very well-financed. The second part was about trying to work with someone who can integrate our business model and create a strong fit for both.
IU: AdvisorShares is strictly an actively managed ETF provider, isn't it?
Hamman: Yes, and we've got two ETFs currently under registration at the moment. One is designed to rotate around different sectors in the marketplace, depending on a specific subadvisor's style and methodology. The second one is a country rotation fund, which will shift between emerging and developed markets around the world—including the U.S. So it's a truly global ETF strategy. And each can use other underlying ETFs, so each will be an ETF-of-ETFs. But we expect to register more products that will employ a number of different strategies, both in terms of ETFs-of-ETFs as well as more traditional ETFs comprised of different stocks. Our plan is to work with a broad range of subadvisors. A single ETF could have multiple subadvisors with an overlay manager around it.
IU: How close are you to getting a green light for these from the Securities and Exchange Commission?
Hamman: I would assume we're close. We've been in line for awhile, and from my days at Rydex, I certainly understand that it isn't always a quick process. But I do believe we're within a week or two of getting it, based on the feedback we're receiving from the SEC.
IU: These first two ETFs are built as retail strategies, aren't they?
Hamman: Yes, but we plan in the future to launch hedging-like strategies and more sophisticated types of ETFs that will attract some institutional interest.
IU: Will these be truly actively managed?
Hamman: Yes, and I say that because there's nothing in our exemptive relief that limits how much our subadvisors can trade. So we don't want to change how a manager normally conducts transactions. We plan on working with existing mutual fund managers as well as emerging managers in separate accounts or other types of portfolios. In fact, we expect to work with some hedge fund managers at some point. These ETFs won't be a whole lot different than existing actively managed fund strategies found in other investment vehicles.
IU: How will your ETFs deal with transparency issues?
Hamman: They'll be fully transparent on a daily basis. The portfolio manager will make trades on a daily basis and then the fund will disclose those trades before the opening of the next day's session.
IU: Doesn't that lend itself to somewhat stale data?
Hamman: That's a very good question. We plan to incorporate a patent-pending process that improves the ability for our ETFs to trade at a more efficient price. If we get approval, that might open up our ETFs to providing even more timely transparency—in other words, sometime before the end of each trading day. But our exemptive relief request is designed to proceed whether the patent is approved or not. So we could conceivably operate just like any existing actively managed ETF. We think that providing more information to specialists and market makers can only help make a more efficient market that will keep bid/ask spreads tight.
IU: But aren't active managers wary of providing timely information on a daily basis?
Hamman: It's true, and some subadvisors out there won't find such a prospect appealing. For example, when illiquid markets like micro-caps are involved, transparency issues might be more of a concern to some managers. In general, though, we think that most investors aren't going to find it appealing to log on to a computer and track a portfolio that closely. We think there are fund managers who agree with us and don't see transparency as a competitive disadvantage. They see transparency as more of a positive than as more of a negative.
IU: How do transparency issues work with active mutual fund managers in actively managed ETFs?
Hamman: The managers who are going to be the most concerned about transparency issues probably will turn out to be very active traders rather than investors. And again, they're more likely to be people who work in more illiquid parts of the market. Practically speaking, I don't think creating good, smart, actively managed ETFs precludes finding the best investment managers.
IU: What does Fund.com plan to do going forward?
Hamman: Their expansion plan is to make more strategic investments in asset managers and platforms, both in ETFs as well as mutual funds. Their focus also includes hedge funds, variable insurance funds and any sort of pooled investment. Besides those activities, Fund.com plans to create original content and provide expert third-party content for investors. They want to be able to do this as an investment community and bring a social networking aspect to their Web site. Their focus is that individual investors are under-served in terms of advice. So they want to be able to take data and wrap it into high-quality advisory content.