Bringing the hedge fund edge to ETFs
A fundamental strategy for Infrastructure Capital Advisors is to produce income, says Jay Hatfield, CEO and CIO of the firm he founded in 2012, shortly after he took NGL Energy Partners, LP (NYSE: NGL) public on the NYSE in 2011.
The firm still focuses on infrastructure in its portfolio management, but income is fundamental. “We believe that it’s a great strategy that allows people who are thinking about retirement that comfort that they can construct a portfolio where a good percentage comes from income, so they don’t have to sell securities in downturns.”
The firm still has a small hedge fund, but the product line is dominated by infrastructure, particularly energy and real asset-based strategies, and that search for income, often achieved through options strategies.
One of the firm’s flagship funds, the InfraCap MLP ETF (NYSE: AMZA) was the first active MLP fund in the US with options strategy, Hatfield says.
Hatfield previously managed money at SAC Capital Advisors, now Point72, and was Head of Fixed Income Research at energy-focused hedge fund Zimmer Lucas. Earlier in his career he spent more than a decade at Morgan Stanley advising energy and utility companies.
Infrastructure Capital now manages around USD4 billion and has three European ETFs: SPYC, a newly launched active S&P 500 option-income ETF, combining stock selection with a flexible covered-call strategy; NUKZ, focused on the nuclear renaissance, including utilities, uranium, nuclear infrastructure and advanced reactors and PFFI, an actively managed preferred securities income strategy, which is almost exclusively focused on infrastructure with an asset intensive business.
Hatfield says that, with credit funds in particular, the firm believes that if they lend people money, they need to make sure they have assets and ideally real assets.
Hatfield’s hedge fund pedigree is reflected in the firm’s ETF range.
“We do think it’s a big advantage to take a hedge fund approach to ETFs,” he says. “What I mean by that is not just the dumb things that hedge funds do. Hedge funds tend to be too short term because they lose their capital if they don’t make money each month, but they do great in-depth research which means they can go long or short to make money.
“I think that most people don’t do that and we have analysts covering the companies, coming up with their own estimates and constantly talking to the companies which can be a big advantage, so we are excited to take that to ETFs.”
The firm’s initial intentions were to get into closed end funds, colourfully described by Hatfield as the Roach Motels of investing, or using the lyric from Hotel California: ‘You can check in but you can never check out’.
So closed end funds didn’t fit the bill, but Hatfield says: “We wanted that type of permanent business where you are growing a franchise rather than just trading with a great year when everyone puts money in or a bad year when they take all their money out.”
People respond to returns, he says. “Some 98 per cent of the time, I am the CIO of the firm, focusing on producing alpha and that’s why our flagship fund has almost doubled the index since we launched it eight years ago. Inflows are because of the returns – get great returns first and then do the marketing and with active management if the returns aren’t great, you can fix it but with an index fund you can’t.
“We compete with a lot of index funds and wonder why they didn’t do this or that. It makes it easy for us to beat them, but they are often sub-optimally structured.”
The relationship with Europe’s white labelling firm HANetf was initially about running a pipeline fund based on an index. “We said we were interested but said: ‘Let’s launch a preferred stock fund. In the US, Infrastructure Capital’s flagship preferred strategy has over USD2 billion in assets and is five-star Morningstar rated.
“We are happy with the European experience and have good volumes on PFFI. We look at all new markets as a development opportunity for us.
“In the US, if you launch an ETF without doing a ton of work you can easily have an ETF which doesn’t trade so we would support our ETFs by buying them, but most of the US brokerage firms don’t really have good ways of buying good UCITS ETFs so we can’t even buy them to support them, but there has been steady volume since we launched as it’s hard to get good yield – it’s been pleasantly surprising.”
The firm is moving to the next phase with a suite of four new ETFs in the next six months, likely to continue with the income theme and to include a bond fund and a pipeline fund.
“We are trying to build a long-term business, so we are not short and leveraged. We are going to do pretty solid investments which may not get this huge wave of excitement but funds that investors will leave in their portfolios, which is what we do, taking the cash flow and reinvesting it.”
Another fundamental strategy for the firm is being constructive, so the firm has launched the NUKZ fund which is in their core area of energy.
“Triple leveraged would be nice, with USD2 billion in a week, but we want to make money the hard way,” he says.
“My theory of business is that really successful business people seem like geniuses but were often the first entrant into the business. I am from California and our billionaires were builders of railroads in the 1850s – were they geniuses or just first?
“We were late to the hedge fund market but saw ETFs as disruptive so we wanted to be one of the first movers. In Europe it’s moving quickly but there is still an early mover advantage.”