What does former hedge fund manager Michael Steinhardt know about the ETF market that other investors don’t?
Steinhardt, chairman and principal shareholder in WisdomTree Investments, the seventh-largest sponsor of exchange-traded funds and the only publicly traded company that focuses exclusively on them, is cashing out his holdings in the company at a time when fund closures are hitting record levels. WisdomTree itself closed 3 of its 49 funds on Monday, a large-cap growth fund along with two ETFs tied to the South African rand and Japanese yen.
To be sure, ETF fund flows continue apace. WisdomTree’s assets under management grew 12 percent, to $16.8 billion from $15.0 billion, during the quarter that ended on September 30. And the most recent figure was roughly 50 percent higher than the year-earlier one.
But WisdomTree last month announced a follow-on equity offering of 26 million shares that is expected to raise $159 million, with all the shares consisting of those held by Steinhardt and other insiders, including the principals of the private equity firm of RRE Ventures, and all the proceeds going to them. The company went public in July 2011, listing its stock on the Nasdaq exchange, but only 35 million of the total of 120 million shares issued were sold to the public.
The new offering will reduce Steinhardt’s shares in WisdomTree, including those held by a foundation he runs in his and his wife’s name, by 11.6 million shares, and his proportion of the total outstanding from 25 percent to 16 percent. RRE Ventures’ 15 percent holding — 18.2 million shares — will drop to zero. Steinhardt and the foundation sold another 10.1 million shares for $58.8 million on November 15.
“It’s pretty clear [the offering] is designed to help Steinhardt liquidate,” says Dave Nadig, director of research at IndexUniverse, an ETF research firm based in San Francisco. Nadig adds that it’s equally clear that the industry is consolidating, citing a “price war” that saw Vanguard move in October to cut costs for its biggest ETF by dropping the MSCI index in favor of one offered by FTSE.
WisdomTree failed to respond to a request for an interview with Steinhardt.
Other observers say the WisdomTree offering doesn’t indicate much at all about the ETF market. “I don’t think we can draw any conclusions from that fact that several insiders are selling,” says Michael Rawson, an analyst at Morningstar.
Still, roughly 100 ETFs have closed this year, the highest number since 2008, when 59 ETFS were shuttered. “We’ve seen consolidation happen around the industry,” says Nadig. “Companies are refocusing on core products.” As for Steinhardt and RRE, says Nadig, “These are some of the smartest people in the room in the ETF universe.”
