NY Life Expands Liquid Alts Business with IndexIQ Acquisition

New York Life Insurance, owner of the MainStay Marketfield Fund, has agreed to acquire leading alternative ETF provider IndexIQ, according to a December 4 press release. The acquisition is expected to close by mid-2015. Terms of the deal were not disclosed.

New York Life is the latest in the line of several mutual fund businesses to acquire smaller ETF providers. The ETF industry is steadily growing, and liquid alts are becoming a key component of that growth. As the operator of the IQ Hedge Multi-Strategy Tracker ETF, along with ETFs that emulate individual alternative strategies, such as merger-arbitrage and market neutral, IndexIQ has been at the forefront of both trends.

New York Life Enters the ETF Biz

The acquisition is intended to facilitate New York Life’s entry into the ETF space, which will complement its alternative mutual fund business, led by the flagship MainStay Marketfield Fund (MFADX). InvestmentNews reports that the MainStay Marketfield Fund has been one of the biggest beneficiaries of increased investor demand for liquid alts, even as its performance has trailed that of the S&P 500 by 23 percentage points in 2014. The fund made its name with its significant outperformance of the broad market during the financial crisis, and it should be noted that most alternative investments are expected to underperform during bull markets.

InvestmentNews quotes New York Life Investment Management CEO Drew Lawton as saying the transaction puts New York Life “into the forefront of two very important growth trends in the industry: Not just ETFs, but also alternatives and, maybe more specifically, liquid alternatives.” It’s also reported New York Life may launch ETF versions of its popular mutual funds – including the MainStay Marketfield Fund.

IndexIQ’s ETF Lineup

The bulk of IndexIQ’s $1.5 billion assets under management (AUM) belong to its IQ Hedge Multi-Strategy Tracker ETF (QAI), with $950 million in AUM. The fund is designed to replicate the IQ Hedge Multi-Strategy Index, which tracks hedge funds pursuing strategies such as long/short equity, global macro, market neutral, event-driven equity, fixed-income arbitrage, and more.

IndexIQ also operates the IQ Merger Arbitrage Index ETF (MNA), the IQ Real Return ETF (CPI), and the IQ U.S. Real Estate Small Cap ETF (ROOF), with a combined total of less than $180 million AUM.

While the average trading volume of QAI is around 167,000 shares a day over the past three months, the average daily volumes for MNA, CPI, and ROOF are much lower, at roughly 19,000; 2,700; and 23,000 shares, respectively. IndexIQ co-founder and CEO Adam Patti said the less popular IndexIQ ETFs may benefit from New York Life’s marketing power.

Conclusion

Investors have been shifting from traditional mutual funds to low-fee index ETFs for years, but the issues around transparency with active management under the ETF structure has helped maintain the demand for actively managed mutual funds. With the SEC’s recent decision to allow non-transparent, actively managed ETMFs (exchange-traded managed funds), some mutual fund providers are starting to make moves to enter the ETP (exchange-traded products) space, as the new legal status of actively managed ETPs is likely to reduce demand for mutual funds over the long-term.

Firms like IndexIQ don’t try to compete with purely passive products like State Street’s SPY, which tracks the performance of the S&P 500 Index and maintains an expense ratio of about 0.1%. Instead, IndexIQ provides ETFs based on alternative indices, thereby striking out a sort-of middle ground between active and passive management. This type of alternative indexing is also a developing industry trend.

Referring to ultra-low-fee ETFs like SPY, Mr. Lawton told InvestmentNews “that’s really not our natural space.” Instead, through its IndexIQ acquisition, New York Life is “creating more access to hedge funds, or hedge-fund-like vehicles, to a much broader population than probably has had access to them in the past,” and in so doing, the firm is positioning itself to take advantage of a number of developing industry trends.

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