Nancy Davis Has $1 Billion After Ditching Hedge Fund for ETF

Nancy Davis of Quadratic Capital Management LLC offered a glimpse of the future when she pivoted from her hedge fund to launch an ETF in 2019.

She’s never looked back — and her success is a hopeful omen for the first hedge fund to actuallyconvert itself into an exchange-traded fund, announced last week.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) has become a breakout hit amid fears of rising prices from government spending to combat the coronavirus. In fact, assets jumped to more than $1 billion on the same day Upholdings Funds LLC — the first hedge-fund-to-ETF conversion — confirmed the switch of its tiny tech portfolio into an ETFwrapper.

The ETF is “beneficial to our investors because it gives them lower fees, it gives them the transparency of a managed account, it gives them liquidity, it gives them no incentive fee,” Davis, founder and CIO at Quadratic, said in a phone interview. It’s also “one of those ‘don’t fight the Fed’ trades.”

While Davis emphasizes that her long-only ETF is different from her former hedge fund, it reflects the direction of travel for the broader asset management industry, where passive vehicles and exchange-traded products have been steadily stealing market share from mutual and hedge funds.

In 2019, for a fifth straight year, more hedge fundsclosed than opened. While some star managers won big in 2020, many shut their doors andfees remain under pressure. As for active mutual funds, they’ve lost assets on a net basis for six years running.

IVOL launched in May 2019 and has gained 13% since its inception, but it is in the past six months that interest has really begun to take off.

The fund aims to use bonds and derivatives to protect against rising long-term interest rates and the return of inflation — and rising prices are a hot topic on Wall Street just now.

With a Blue Wave handing Democrats control of both the White House and Congress, investors are betting that more U.S. economic stimulus is on the way. Cash haspoured into reflation trades like small-cap stocks and inflation-protected bonds.

The latter form a key part of IVOL. In fact, about 86% of the fund is currently invested in the Schwab U.S. TIPS ETF (SCHP), according to data compiled by Bloomberg. That may surprise some, especially since IVOL charges a fee of 0.99% compared with SCHP’s 0.05%.

Davis says using SCHP ensures the ETF has good liquidity and helps with tax efficiency, while IVOL’s overall composition provides investors with protection against a broader measure of inflation. The rest of its assets comprise interest rate options and cash.

For Davis, who started her firm in 2013 after stints at Goldman Sachs Group Inc. and AllianceBernstein, the move into the ETF industry appears to be paying off. Quadratic’s assets have climbed above $1 billion from about $171 million before the ETF was launched. The hedge fund had carried a minimum investment of $1 million.

“The fund made money in the first quarter, second quarter, third quarter and fourth quarter” of 2020, said Davis. “I think there are very, very few strategies out there that could perform in so many different environments.”

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