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June 8, 2012

Merlin Conjures Up ETF Tool

By James Armstrong

Prime broker Merlin Securities is offering hedge funds a new tool to help them see the components underlying exchange-traded funds, so traders can get a complete picture of their positions.

Merlin's ETF decomposition tool allows clients to run a position report that can tell them their total exposure to a stock, whether it is held outright or indirectly through an ETF. The tool can be used for risk management and to help attribute portions of fund performance to individual stocks.

Ron Suber, head of global sales for Merlin Securities, said clients had been asking for a way to put the underlying components of an ETF into position reports. Merlin has been offering the tool since March, giving clients an option to see positions with their ETFs viewed either as a whole or as component securities.

"You can run it either way," Suber said. "You can roll it up as an ETF, or you can hit the decompose button and then rerun the position report getting the underlying components."

Suber points out a fund might have a large holding in a certain company, but then also have exposure to that stock through a sector ETF or an ETF tracking a broad index. By taking a look at an ETF's underlying securities, a trader can view total exposure to that stock. Managers can also determine how much of overall performance came from individual names.

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