A Creative Approach to Actively Managed PE ETFs: Q&A with PEO Partners’ Randolph Cohen 

Actively managed private equity exchange traded funds (ETFs) are a bit of a niche within the broader ETF universe, blending the hands-on approach of active management with an attempt to capture the essence of private equity strategies in a publicly traded format. These funds aim to give investors exposure to private equity-like returns—think leveraged buyouts, growth capital, or turnaround plays—without locking up capital in illiquid, long-term private funds. Instead, they trade on exchanges like stocks, offering liquidity and flexibility. 

The catch is, true “private equity” involves direct investment in non-public companies, which doesn’t fully align with the ETF structure, as ETFs typically hold liquid, publicly traded assets. So, actively managed private equity ETFs often take a creative approach. They might invest in public companies that exhibit characteristics of traditional private equity targets—say, firms ripe for buyouts or with high growth potential—or use derivatives like futures or options to amplify returns and mimic the leverage private equity funds often employ. Some even blend equity and debt strategies to replicate the risk-return profile of private equity. 

Randolph Cohen, co-founder of private equity liquid alternatives platform PEO Partners, in partnership with AlphaQuest, have introduced an actively managed ETF, PEO AlphaQuest™ Thematic PE ETF (Ticker: LQPE). Cohen shared with Connect why now is an opportune time to introduce such a product, the differentiator from traditional equity ETFs and the role of derivatives in these strategies. 

CM: What is the focus of the new ETF launch?   

RC: LQPE is a new ETF that uses publicly traded instruments to emulate some of the investment themes of private equity buyout managers. 

CM: Why is now a good time to introduce this product?   

RC: I have been interested in this concept for over two decades, but now is the right moment for multiple reasons. First, until recently, high-quality data on the holdings of private equity firms was not available. Second, only recently has it become common knowledge that PE has historically delivered an impressive return profile, but in vehicles that are hard for most investors to access.  

CM: What makes this ETF different from traditional equity ETFs?  

RC: Three differences stand out. First, this ETF employs sophisticated derivatives strategies that seek to minimize volatility and downside risk. Second, to seek to emulate leverage as leveraged buyouts do, the ETF uses futures to add market exposure. Third, this ETF employs a unique data set of aggregate holdings of PE firms in an effort to use the knowledge of the universe of PE fund managers to deliver superior stock selection. We believe this is a unique strategy as compared to traditional equity ETFs, in our stock selection methods and in the use of derivatives. 

CM: How does the actively managed nature of this ETF differ from typical index funds?   

RC: Typical index funds track a static portfolio of stocks, whereas this ETF has a curated set of equities and rebalances our equities quarterly to reflect changing industry allocations of private equity holdings and updated factor calculations. Also, the ETF includes some innovative derivatives strategies; our partner AlphaQuest hedges the portfolio and uses S&P futures to emulate the increased exposure that private equity gains through leverage. 

CM: What are the key investment themes of traditional private equity that this ETF will target? 

RC: PE firms in the leveraged buyout space add value for their clients in multiple ways that we seek to deliver. First, PE funds are exceptionally good at selecting which industries to tilt toward, and we match the industry tilts of PE.  Second, within each industry PE invests in, they tilt toward companies with certain traits like high profit and low multiple, and we incorporate these types of traits into our selection process. Third, PE uses leverage to improve expected returns; the ETF seeks to do this as well. Finally, PE reports quarterly returns that are smoother than what public markets deliver, and the ETF uses derivatives to be similarly less volatile. 

CM: How does this equity strategy resemble leveraged buyouts? 

RC: The equity strategy is designed to emulate certain PE themes by first, choosing stocks in industries like the industry allocations of traditional PE, and second, within each industry, finding stocks with favorable combinations of traits such as profitability, payout ratio, value and lower beta risk. 

CM: Explain the role of derivatives in this strategy. 

RC: The ETF will use derivatives strategies designed to achieve two goals. First, to increase equity exposure, which PE funds typically achieve through traditional leverage, through the use of equity index futures. Second, to hedge the market with the goal of reducing downside volatility of performance, which is also a characteristic of PE funds. Together, the equity and derivatives strategies emulate many investment themes of traditional PE. 

CM: What kind of risk should investors be aware of with these strategies? 

RC: We encourage investors to see the prospectus for detailed information on potential risks.