The team at a pioneer in fitting active strategies inside of exchange-traded products is taking a second stab at such a structure, even as their first such offering continues. The chief sees the new structure, if approved, overcoming key distribution hurdles faced by its predecessor.

Thomas E. Faust Eaton Vance Chairman, CEO

On February 20, Boston-based Eaton Vance [profile] filed with the SEC for exemptive relief to create ETFs powered by its proprietary Clearhedge Method for keeping portfolio trading activity confidential, chairman and CEO Tom Faust confirmed. Faust also promoted Stephen Clarke, currently president of Eaton Vance's NextShares Solutions (fka Navigate Fund Solutions) arm, to become president of Eaton Vance's newly created Advanced Fund Solutions (AFS) subsidiary. The AFS team will handle both the new Clearhedge Method and the existing NextShares structure.

Stephen W. Clarke Advanced Fund Solutions President

"We believe the Clearhedge Method could benefit ETF investors by lowering the costs they pay to buy and sell shares, mitigating the performance impact of front-running of fund trades and facilitating the introduction of proprietary active strategies not currently available as ETFs," Faust states.

"Innovation is alive and well at Eaton Vance," Clarke says.

The Clearhedge Method, for which Eaton Vance received a patent last fall, is intended to help market makers create and destroy an ETF's creation units in real-time throughout the market day, without the real-time disclosure of the precise investments in that ETF's daily creation unit basket. A Clearhedge-powered ETF would disclose such a basket each day, of "liquid interests that trade within U.S. market hours" and "designed to have a high level of correlation with the fund itself." To back that up, the ETF would be able to enter into swap agreements with the market maker, swaps that could later be used to swap the performance of that disclosed basked to the performance of the actual securities underlying the ETF.

"A swap administration agent would stand at the ready to issue new swaps every second over the course of the trading day," Clarke tells MFWire. "The goal of this is to have tight bid-ask spreads ... resulting in efficient trading."

"It's novel, and it's a really simple, elegant solution," Clarke adds.

Beyond active ETFs, Clarke says, that Clearhedge trading efficiency could be appealing for use with passive ETFs that hold securities that are difficult to value, such as foreign stocks.

If approved, Clearhedge-powered ETFs may face an either path to distribution than their NextShares siblings have faced. Eaton Vance's NextShares exchange traded managed funds structure necessitates platform changes to accommodate, which has perhaps contributed to distribution difficulties for that structure. In contrast, the Clearhedge Method is for use inside of the existing ETF structure.

"One of the challenges that we've faced with NextShares has been broker-dealer technology," Clarke says. "In order for NextShares to operate on a broker-dealer platform in an automated fashion, dealers need to make adaptations to their technology environment to support the trading ... It takes some work, and it takes some prioritization."

"An advantage that ETFs have is substantially all broker-dealer systems are equipped for ETF trading," Clarke explains. Clearhedge-powered ETFs "would be just like any other ETF" for the platforms "and thus could plug into any other broker-dealers' systems."

Meanwhile, AFS will also continue to work on its NextShares fund structure, too, Clarke says. So far, eight fund firms (including Eaton Vance) are running a total of 18 NextShares funds, and the funds are available on platforms from three broker-dealers. Another dozen or so firms have signed up but not yet launched NextShares, Clarke notes. And though distribution has been a challenge, the NextShares are working as expected, with tax and performance benefits, Clarke says.

"We have the NextShares product set that is performing as we hoped it would, and we are working on advancing that business," Clarke says.

For Eaton Vance, Clearhedge is a kind of hedge for its NextShares business, and NextShares is a hedge for Clearhedge. If the SEC warms up to special active ETF structures designed to be more active-friendly with their disclosure structures, then Clarke and his team see Clearhedge positioned well to move forward. And if things continue as they are, with no such special active ETF structures gaining approval for some time, the AFS team has NextShares, which was approved by the SEC in 2015 and has been used by live funds since 2016. 

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