Source, Man GLG Launch ETF Tracking Brokers’ Tips

ETF issuer Source has combined with Man Systematic Strategies (MSS) to launch a new fund based on the trade ideas generated by Europe’s brokerage community.

The Man GLG Europe Plus Source ETF will trade by using computer algorithms to select from amongst the research ideas generated by Europe’s brokerage community.  According to Source and MSS, backtests of the model imply an outperformance of over 2% a year when compared to representative large-capitalisation equity benchmarks.

The fund’s underlying Man GLG Europe Plus index has similar market-cap exposure to the broad European equity market, say the ETF’s sponsors.

Conceptually, the new ETF is similar to Marshall Wace’s Tops Global Alpha ETF, which was launched nearly a year ago and has raised over €250 million in assets.  However, there are differences between the two ETFs: the MW Tops ETF allows both leveraged exposure and invests both long and short, using brokers’ tips, whereas the new Man GLG Europe Plus Source ETF is a long-only fund and will not be leveraged.

MSS runs two other institutional accounts that follow the same algorithm, said Sandy Rattray, head of the systematic strategies division of Man GLG in a conference call held Monday January 31.  However, these existing funds are unlikely to place their trades at the same time as the new ETF, he said.  The ETF is likely to change its portfolio positions at the close of each trading day, Rattray added, since this is the time at which the fund’s underlying index is rebalanced.

The ETF carries an annual management fee of 0.75%.  However, the index calculation assumes almost as much in transaction costs.  A 6 basis point commission payment is built into the index for each purchase and sale of an individual equity.  Since the Man GLG Europe Plus index is likely to change its underlying constituents around six times a year on average, according to Rattray, an investor in the fund  can expect to pay total commissions of 72 basis points per annum.  The commissions generated in this way go to remunerate those brokers whose ideas prove profitable to the fund.

Since the ideas generated by the fund’s underlying index algorithm may be considered market-sensitive, only the ETF’s authorised participants will see the full underlying portfolio on a daily basis.  Disclosure of positions to the wider market will be weekly and subject to a two-week lag.

Replication of the underlying index will be achieved using swaps, rather than holding the underlying index securities directly, said Ted Hood, CEO of Source.

Markit, the index provider, has been appointed as the independent calculation agent for the fund’s benchmark.

The fund will start trading on the German stock exchange on February 3.

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