Generating the Creation Basket
Generating the daily Creation Basket for a Shielded Alpha℠ ETF is rapid and efficient. All operational workflow is securely processed in Blue Tractor's online platform - the Shielded Alpha℠ Service.
Following the close of trading (Day T) the fund advisor's custodial bank or administrator calculates the end-of-day NAV (net asset value) for the ETF. They then upload the confidential ETF portfolio to the Shielded Alpha℠ Service through a standard web browser or if bulk processing is required, via a secure file transfer protocol (SFTP), and the Blue Tractor proprietary algorithm is initiated. In moments a Shielded Alpha℠ Creation Basket portfolio file is returned ready for the next day's market open (Day T+1).
The Creation Basket (a.k.a. the portfolio composition file or PCF) is then sent by the custodial bank or fund administrator to the National Securities Clearing Corporation (NSCC), where it will then be disseminated to all market participants for use on Day T+1, as well as being posted on the ETF fund's website.
The Perfect Balance Between Transparency and Opacity
The Shielded Alpha℠ ETF Creation Basket will always contain 100% of the names of the Securities in the ETF portfolio. So if AAPL is in the ETF portfolio, then AAPL will be in the Creation Basket.
However the % weightings of the stocks in the Creation Basket will always differ from their actual % weightings in the ETF portfolio. So if AAPL was at its target weighting of 2.00% in the ETF portfolio on Day T, the weighting of AAPL in the Creation Basket for Day T+1 could be underweight at 1.94%, on Day T+2 it could be overweight at 2.22% and on Day T+3 it could be back down to 1.88%...the day-to- day algorithmic variation in the securities' Creation Basket weightings are wholly random.
It is the daily mismatch in % weightings between the actual ETF portfolio names and the published Creation Basket securities that fully obfuscates an advisor's alpha generation strategy because anyone observing the daily published basket will never know if the day-to-day changes in securities' % weightings are as a result of actual ETF portfolio trading or simply random artifacts of the Shielded Alpha℠ algorithm.
Moreover, under the Shielded Alpha℠ ETF wrapper the Creation Basket will always have a minimum 90% asset value overlap with the ETF portfolio, ensuring a high degree of correlation and low tracking error in all market conditions - low or high vol.
So to a market maker or authorized participant the Shielded Alpha℠ wrapper is a highly transparent ETF because (1) all the portfolio names in the ETF are in the Creation Basket and (2) there is a guaranteed 90% minimum asset value overlap between the portfolios; therefore they can make highly accurate and efficient primary and secondary markets.
However, to any predatory actor the daily, random changes in securities' weightings in the Creation Basket totally shields actual portfolio trading, making the Shielded Alpha℠ wrapper fully opaque in terms of discerning the alpha generation strategy.
The perfect balance.
How Does Shielded Alpha℠ Differ From Competing ETF Wrappers?
In contrast to competing 'proxy portfolio' wrapper structures, with the Shielded Alpha℠ Creation Basket proxy stocks to mirror actual portfolio stocks are never used, extraneous stocks or instruments are never included, nor are actual ETF portfolio stocks ever omitted. And there is never a 5 to 15 day lag to include actual portfolio trading activity into the Creation Basket securities. These are all features that can increase risk for market makers and authorized participants.
Moreover, with the Shielded Alpha℠ wrapper no authorized participant representative accounts for the daily basket are required, nor does an fund advisor have to disclose the confidential ETF portfolio daily to third party pricing agents in order to disseminate a 1-second indicative value. Under Blue Tractor's ETF wrapper at no time will the advisor's actual holdings be revealed to any third party (including Blue Tractor).
Note that use of the term "Creation Basket" is synonymous to the "Dynamic SSR℠ Portfolio" described in Blue Tractor's SEC regulatory filings.
Following the close of trading (Day T) the fund advisor's custodial bank or administrator calculates the end-of-day NAV (net asset value) for the ETF. They then upload the confidential ETF portfolio to the Shielded Alpha℠ Service through a standard web browser or if bulk processing is required, via a secure file transfer protocol (SFTP), and the Blue Tractor proprietary algorithm is initiated. In moments a Shielded Alpha℠ Creation Basket portfolio file is returned ready for the next day's market open (Day T+1).
The Creation Basket (a.k.a. the portfolio composition file or PCF) is then sent by the custodial bank or fund administrator to the National Securities Clearing Corporation (NSCC), where it will then be disseminated to all market participants for use on Day T+1, as well as being posted on the ETF fund's website.
The Perfect Balance Between Transparency and Opacity
The Shielded Alpha℠ ETF Creation Basket will always contain 100% of the names of the Securities in the ETF portfolio. So if AAPL is in the ETF portfolio, then AAPL will be in the Creation Basket.
However the % weightings of the stocks in the Creation Basket will always differ from their actual % weightings in the ETF portfolio. So if AAPL was at its target weighting of 2.00% in the ETF portfolio on Day T, the weighting of AAPL in the Creation Basket for Day T+1 could be underweight at 1.94%, on Day T+2 it could be overweight at 2.22% and on Day T+3 it could be back down to 1.88%...the day-to- day algorithmic variation in the securities' Creation Basket weightings are wholly random.
It is the daily mismatch in % weightings between the actual ETF portfolio names and the published Creation Basket securities that fully obfuscates an advisor's alpha generation strategy because anyone observing the daily published basket will never know if the day-to-day changes in securities' % weightings are as a result of actual ETF portfolio trading or simply random artifacts of the Shielded Alpha℠ algorithm.
Moreover, under the Shielded Alpha℠ ETF wrapper the Creation Basket will always have a minimum 90% asset value overlap with the ETF portfolio, ensuring a high degree of correlation and low tracking error in all market conditions - low or high vol.
So to a market maker or authorized participant the Shielded Alpha℠ wrapper is a highly transparent ETF because (1) all the portfolio names in the ETF are in the Creation Basket and (2) there is a guaranteed 90% minimum asset value overlap between the portfolios; therefore they can make highly accurate and efficient primary and secondary markets.
However, to any predatory actor the daily, random changes in securities' weightings in the Creation Basket totally shields actual portfolio trading, making the Shielded Alpha℠ wrapper fully opaque in terms of discerning the alpha generation strategy.
The perfect balance.
How Does Shielded Alpha℠ Differ From Competing ETF Wrappers?
In contrast to competing 'proxy portfolio' wrapper structures, with the Shielded Alpha℠ Creation Basket proxy stocks to mirror actual portfolio stocks are never used, extraneous stocks or instruments are never included, nor are actual ETF portfolio stocks ever omitted. And there is never a 5 to 15 day lag to include actual portfolio trading activity into the Creation Basket securities. These are all features that can increase risk for market makers and authorized participants.
Moreover, with the Shielded Alpha℠ wrapper no authorized participant representative accounts for the daily basket are required, nor does an fund advisor have to disclose the confidential ETF portfolio daily to third party pricing agents in order to disseminate a 1-second indicative value. Under Blue Tractor's ETF wrapper at no time will the advisor's actual holdings be revealed to any third party (including Blue Tractor).
Note that use of the term "Creation Basket" is synonymous to the "Dynamic SSR℠ Portfolio" described in Blue Tractor's SEC regulatory filings.