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Tinker’s Libra brings analysis to active ETFs

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Chris Tinker of London-based Libra is bringing his stock advisory approach to the world of active ETFs. Libra was founded in 2010 and offers systematic market timing and stock valuation.

He recently applied his analysis to the ARKK active ETF fund run by Cathie Wood and, by selecting a 35-stock portfolio from the four ARK portfolio funds, as ARKK does itself, and rebalancing periodically, he reports that he created a systematic risk management process around thematic stock selection – from the same core universe – but with better risk and return outcomes.

Libra’s current target client base is long only funds, hedge funds and wealth management groups, offering highly granular levels of data, signals target prices and advisory information for over 8000 global companies; updated daily.

“As part of the methodology we have developed, the systematic nature of the process means that, if we  can calculate the implied value of a single stock then we can aggregate that up to an index, sector, market or basket level with no loss of generality: so long as we know the constituent make up of an index we can produce index or basket level  measures of value, expected return and factor risk  on a dynamic, forward looking basis,” he says.

For ETFs, Tinker needs an historic and subsequent daily delta PCF file and then he can create dynamic risk and valuation metrics, expected return forecasts and risk/return signals for that ETF as continuous time series – effectively placing the ETF basket in the same investable category as a single stock asset in a portfolio for portfolio risk optimisation purposes. 

“Active ETFs are an interesting evolution of what is going on,” Tinker says. “You look at active ETFs and they sound like a brilliant idea until you realise that you are giving everything away for free.”

Tinker has been in discussions with semi-transparent structure provider Blue Tractor about their ‘Shielded Alpha’ approach which keeps an active ETF’s portfolio shielded.

“Cathie Wood is a traditional fund manager who has recognised that ETFs are the way to take investment positions that you probably couldn’t do in another environment – that takes a bunch of innovative names and pitches it out there. That’s great when momentum is on your side but it’s a problem if you have to manage liquidity in a live, intraday active ETF when everyone can see your risk exposures. She has to do that in plain sight of the entire world.”

He notes that within the hedge fund scenario, prime brokers know what positions the hedge fund has, but they are never exposed. “ETFs don’t get the same comfort of the fees they can charge.”

“I can see every stock in Cathie Wood’s funds so I could reverse engineer her process and come up with a much more profitable portfolio and more risk managed,” Tinker says.

Tinker likes the fact that ETFs democratise investment. And he likes active funds. “If I want to be buying and selling baskets of stocks and themes as an active impact investor, I can put together a fund with proper risk management oversight,” he says.

Recent news implied that the Irish regulatory authorities are taking a further look at allowing the semi-transparent structure to be applied in Europe – they are currently restricted to the US.

“Transparency doesn’t help the investor in terms of stock position weightings,” Tinker says. “It doesn’t help the issuer who wants to keep his secret sauce secret but you need portfolio level risk metrics more broadly available with your ETF issuer.”

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