IndexIQ, the Rye Brook, N.Y.-based firm best known for the development of proprietary so-called next generation indexes for institutions and wealthy investors, has created a new asset management business that will sell products created from its indexes.
IndexIQ's indexes are based on the firm's quantitative proprietary intellectual models that seek out dozens of specific characteristics and attributes in companies.
The new firm will be called IndexIQ Advisors and based in Boston, north of IndexIQ's headquarters. The firm has hired Agustin "Gus" Fleites, an index and exchange-traded fund (ETF) pro, to lead the firm as president. Fleites served as the chief investment officer and head of ETFs at ProFunds, where he helped build the firm's ETF business, and spent 18 years with State Street Global Advisors in Boston, most recently serving as the head of ETFs and subsequently as president of SSgA Funds Management.
The new firm is out of the starting gate with an offering of seven managed account products; three ETF portfolios dubbed ETFIQ, each of which rotates exposure within its chosen underlying asset class using a combination of ETFs; and four HedgeIQ strategies that seek to replicate specific hedge fund strategies but with lower costs than traditional hedge funds and with daily liquidity built in.
The goal now is to commercialize the fundamental indexes the firm has created to a broader audience and attract them to other investment advisors that might want to use them as sub-accounts in their financial products, 401(k) sponsors and brokerage firms, Fleites said. The advisory firm is purposefully being built in Boston so as to separate the development of the indexes from the asset management firm, he noted. Fleites said that he is currently building the firm, which includes staffing up with portfolio managers as well as operations staff.
While IndexIQ is seeking to develop a suite of ETFs, mutual funds and additional separately managed account strategies for a broad audience, the short-term goal is to discuss potential products with the plan sponsors of small- to medium-size defined contribution plan sponsors and their consultants as an entree into the 401(k) space, as well as with financial advisers including broker/dealers for potential inclusion of IndexIQ financial products on wirehouse platforms, Fleites said.
"We're trying to convert the world to rules-based alpha indexes," Fleites quipped. He believes the firm's current series of lifestyle indexes would be perfect for 401(k) plans.
The firm already has a novel family of 20 ETFs in registration with the Securities and Exchange Commission. Each will track to an IndexIQ index including the "best of" companies, such as the most productive companies, the fastest-growing companies, those corporations with the best corporate governance and those cited as customer loyalty leaders.
"We spent the first year of our business building out an index product line," said Adam Patti, chief executive officer at IndexIQ. "We want to continue to offer licenses to different organizations, but we also want to commercialize the strategies," he added. "Our goal is to launch a variety of our [index-based] strategies into the marketplace and wrap these strategies into mutual funds, separate accounts and ETFs."
While Patti noted that any of IndexIQ's indexes would be strong candidates to underlie new products, he believes that the firm's synthetic hedge fund replication indexes will be enthusiastically accepted by investors. These were first introduced this past March. These indexes utilize traditional, highly liquid asset classes (equities, fixed-income, real estate, currencies and commodities) in varying amounts such that the returns of different hedge fund strategies can be mirrored within a liquid and transparent investment vehicle.
The firm has been busy pitching its indexes to potential partners looking for innovative indexes around which to create products. This past April, IndexIQ formed an agreement with Claymore Advisors of Lisle, Ill., to license the rights to use an active value index that it had created as the basis for a new small-cap ETF, resulting in the co-branded Claymore/IndexIQ Small-Cap Value ETF.
Then in May, it signed a deal with Advisor Partners of San Francisco for the development of several new and diverse separate account strategies using IndexIQ indexes. These are aimed at independent advisers, wealth managers and family offices. Advisor Partners creates portfolio solutions for various clients and advisory platforms.
IndexIQ's full-fledged launch into the asset management business means that the index-based financial products marketplace is getting even more crowded. In addition, the growth of this portion of the market has ended up putting former executives at "original recipe" index creator firms in a potential battle to see who can land the most market share.
Bruce Lavine, a Barclays Global Investors alumnus and president and chief operating officer for WisdomTree Asset Management in New York, which has been busily building its own fundamentally based indexes and partnering with firms for products, believes there's plenty of room in the market for all of the new index providers.
"What you are seeing is tremendous ETF innovation. It's a hot bed of activity," he said. "People are realizing there's much more to ETFs than just cap-weighted benchmarks."
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