I'm wondering who the counterparties to these TRSs are - I would imagine they are quite profitable from from that spread. How does it work from their perspective? Do they hedge the levered security?
The counterparty’s name is usually given. Sometimes it can be a bit cryptic (CF = Cantor Fitzgerald for instance) but usually it’ll just say the name of the firm like BNP Paribas, Goldman, JPM, etc. As far as what the counterparty does, my understanding is they hedge by getting long equal to the notional of the underlying. So that would keep them flat. But that is not a world I’m familiar with. Others would know much better.
Yeah, I'm looking at it more from an investor standpoint. I've heard all the arguments that ppl are going to get hit with usurious costs/onerous terms if they try to buy one of these stocks on margin. Fine. Those costs are out in the open, however, and so too should these embedded swap costs - they ought to be bundled into the expense ratio and then folks would appreciate that they're paying not 0.95% annually but some multiple of that. (I feel even more strongly knowing these swaps are being used to circumvent the RIC rules that otherwise prohibit concentration. It seems contrary to the spirit of the act and then cherry on top is the fees are buried.)
My podcast is about "delivering better outcomes for investors" so I'm very clear and appreciative about your standpoint. But this is too funny, especially as I suspect the users would like to stick it to Wall Street!
I'm wondering who the counterparties to these TRSs are - I would imagine they are quite profitable from from that spread. How does it work from their perspective? Do they hedge the levered security?
The counterparty’s name is usually given. Sometimes it can be a bit cryptic (CF = Cantor Fitzgerald for instance) but usually it’ll just say the name of the firm like BNP Paribas, Goldman, JPM, etc. As far as what the counterparty does, my understanding is they hedge by getting long equal to the notional of the underlying. So that would keep them flat. But that is not a world I’m familiar with. Others would know much better.
At industry level (the issuer doesn't capture all the fees) these instruments are a godsend, compare that to 3bps on a multi billion SP500 etf
Yeah, I'm looking at it more from an investor standpoint. I've heard all the arguments that ppl are going to get hit with usurious costs/onerous terms if they try to buy one of these stocks on margin. Fine. Those costs are out in the open, however, and so too should these embedded swap costs - they ought to be bundled into the expense ratio and then folks would appreciate that they're paying not 0.95% annually but some multiple of that. (I feel even more strongly knowing these swaps are being used to circumvent the RIC rules that otherwise prohibit concentration. It seems contrary to the spirit of the act and then cherry on top is the fees are buried.)
My podcast is about "delivering better outcomes for investors" so I'm very clear and appreciative about your standpoint. But this is too funny, especially as I suspect the users would like to stick it to Wall Street!