A fintech startup is asking for the SEC's blessing to fit active, long-short strategies inside of ETFs while still keeping the strategies' secret sauce hidden. The move comes after the regulatory agency blessed another upgrade to the startup's special ETF structure.

Terrence "Terry" Norman Blue Tractor Group Founder

On March 19, the Blue Tractor Group team filed for SEC approval of expanding their Shielded Alpha structure's exemptive relief to include long-short strategies. According to the Blue Tractor team, they're the first of the six semitransparent ETF wrappers (more commonly known as "ANT ETF" structures, i.e. "active, non-transparent") to file to include long-short strategies.

"We don't know if the others can do it," Simon Goulet, co-founder of Blue Tractor, tells MFWire. "We'll see."

"A number of potential licensees have come to us, wanting to move from mutual funds into ETFs. They really like the story, tax efficiency, lower costs," Terry Norman, founder of Blue Tractor, telling MFWire that many of these interested asset managers use long-short strategies. "We're literally fighting those guys off."

Adding long-short capabilities "expands the investor choice enormously."

Under Blue Tractor's request, Shielded Alpha would be usable by long-short strategies that use physical short-selling, but not ones that use short-selling by way of margins or options. And the strategies would still use Blue Tractor's cloud-based algorithm to offer creation units that reveal all of an ETF's underlying portfolio holdings while obscuring the true weightings of those holdings.

Meanwhile, on March 9, the SEC issued an order approving another expansion of Blue Tractor's exemptive relief, this one to allow for the use of custom baskets in the Shielded Alpha structure. Goulet describes that piece as the "final bit of flexibility required" for the Blue Tractor folks to push now to include long-short equity strategies, too.

"It was the custom baskets that allowed us to do that as well. It's going to permit Blue Tractor to do a lot of interesting stuff going forward," Goulet says. "We're now on a level playing field with fully transparent ETFs because of that feature."

So far, two ETFs have already launched using the Shielded Alpha structure, and Goulet confirms that the Blue Tractor folks are having "lots of discussions with other groups" about future launches. Looking ahead, Norman hints that Blue Tractor will soon be pushing to expand the Shielded Alpha investable universe to into more areas, like emerging market equities.

"There's a timing for everything," Norman says. 

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