The closure of these funds makes them the first to be closed in the US Active ETF space, since the very first actively-managed ETF from Bear Stearns went down with the company in 2008. The RP Technology and the RP Financials ETFs were both launched in October 2009, as part of a group of 4 Active ETFs that also included the RP Growth ETF (RPX: 26.01 0.00%) and the RP Focused Large Cap Growth ETF (RWG: 26.855 +1.53%). The two funds that are being closed had seen hardly any in flows since their launch, with both of them languishing around the $2.5 million mark, majority of which is likely the seed capital that the funds started off with in the first place. Both funds had an expense ratio of 0.89% and RFF aimed to outperform the S&P Financials Index, while RPQ aimed to outperform the Nasdaq Composite. RPQ was able outperform its benchmark by a significant margin since inception, but RFF had a harder time and generally stuck quite close to the performance of its benchmark index.

Both funds were sub-advised and managed on a day-to-day basis by RiverPark Advisors, run by CEO and Managing Partner, Morty Schaja. He commented, “By all appearances, the marketplace is not ready for these sector funds. We’ve been pleased with the performance of the RP Technology ETF but flows have still been disappointing. I believe investors will be better served by incorporating the best ideas of these two sector funds into our RP Growth ETF (RPX) offering”. That might imply that RiverPark and Grail Advisors plan to push on with the RP Growth ETF for the while being, even though that fund has not tasted much more success than the two funds being closed. RPX’s assets stood at $3.96 million as of July 31, 2010. The CEO of Grail Advisors, Bill Thomas, also chose to direct attention to future possibilities, saying that, “With this move, we are dedicating our resources to the areas of most interest to investors, including the introduction of several exciting new funds in the coming months that will have broad appeal in the marketplace”.

Many such new funds are not profitable for fund companies until they cross a certain threshold in assets. The threshold to achieve that break-even is seen to be around $30 – $50 million, but for small scale players like Grail Advisors, that threshold is likely on the higher end of the range because they don’t benefit from the scale efficiencies that larger ETF manufactures like Invesco PowerShares have. At the moment, the largest of Grail Advisors’ seven actively-managed ETF is the RP Focused Large Cap Growth ETF (RWG) with assets of only $6.65 million. So it is quite likely that each of Grail’s current offerings are loss-making propositions for the company. RiverPark, the sub-advisor to four of Grail’s ETFs, has filed with the SEC to launch its own actively-managed ETFs as well and has 3 different Active ETFs in the works.
 
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RiverPark Small Cap Growth ETF

This fund will be of interest to investors that are looking to pursue an actively-managed strategy in the US small-cap sector that has been shown to hold more inefficiencies and hence active return possibilities compared to general large-cap equities which are part of most portfolios. The fund invests in companies that are less than $2.5 billion in market cap and operate in industries that are beneficiaries of long-term secular change in the opinion of RiverPark. RiverPark seeks companies with latent pricing power, expanding free cash flow and a high return on invested capital. As most value managers do, RiverPark looks for the opportunity to invest in its high conviction ideas at times when it believes a company’s prospects are misunderstood by other investors or analysts or the markets react to short-term events that bring the stock price down to attractive levels.

RiverPark Short Term High Yield ETF

For investors looking to gain exposure to high-yield bonds but on the short-end of the maturity spectrum, this proposed ETF will provide that possibility. This fund invests at least 65% of its assets in high-yield securities, typically less than 3 years in maturity. The fund is sub-advised by Cohanzick Management Inc, which is focused on credit-oriented, event-driven and special situations. Cohanzick can also invest up to 25% of assets in securities that exceed 3 years in maturity, but only if it anticipates an event that will cause it to mature within the 3 years time frame. The sub-advisor applies a “bottom-up” approach to security selection, evaluating whether each security is suitable for the fund’s investment objective.

RiverPark/Gravity Long-Biased Fund

This fund provides investors with the possibility of investing in an actively-managed ETF that pursues a US fundamental driven large-cap value strategy, with the possibility of a short overlay of up to 30% of NAV used to help dampen volatility and reduce market exposure. The portfolio will be sub-advised by an investment manager by the name of Gravity which will seek to find undervalued US large-caps relative to their long term prospects. The portfolio managers look at 3 key factors before investing in a security – the soundness of the business model, the quality of management and the price they are being asked to pay for the security. The degree of short overlay implemented will depend on the bearishness of Gravity’s macro analysis and also on Gravity finding companies that are potentially overvalued, discovered through fundamental analysis.
 
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The planned RP Short Term High Yield Bond ETF will invest in short-term high yield debt maturing in less than 3 years and rated BB or below. The fund will be sub-advised by Cohanzick Management LLC. The RP Energy ETF will invest primarily in large-cap equities in the energy sector and will be benchmarked against the S&P Energy Index. This fund will be sub-advised by Gravity Capital Management LLC.

In an interesting parallel development, AdvisorShares announced on Feb 18, 2010, a partnership with Peritus Asset Management to launch another actively-managed high-yield bond ETF as well. So, while both issuers might have been expecting to enter an empty high-yield bonds space within the Active ETF arena, that doesn’t seem to be the case anymore. Also, where RiverPark and Grail Advisors did not ink an exclusivity agreement, AdvisorShares and Peritus did – meaning that Peritus will develop all future ETF launches with AdvisorShares.

This move by RiverPark could give ideas to the sub-advisors of other existing Active ETFs on the market, such as American Beacon, McDonnell and AER Advisors. They will be asking themselves why they need to use their managers to bring their active management expertise to market, if they can do it themselves. In that light, the exclusivity agreement between Peritus and AdvisorShares might well turn out be a smart move by AdvisorShares.

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Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.