Aperture’s Peter Kraus takes aim at passive ETFs and the ‘illusion of free’ with new startup

“We’re breaking beta from alpha. That doesn’t exist anywhere. We’re literally saying, ‘Only pay us for alpha and define beta. Nobody has done that.” That’s an energized quote from legendary Wall Streeter Peter Kraus. For those not familiar with the lingo, I’ll translate: Kraus’s new company Aperture, which has just launched a new mutual fund offering (yes, you read that right: a new financial start-up is launching mutual funds in 2019), is seeking to create a true blue pay-for-performance model that emphasizes beating a market benchmark, not just tying it to an index as most passive funds do.

Why not offer a slick ETF, give it a cool name and make it “smart” so as to add some spice? If you have to ask that, then you don’t know Kraus. In breaking bread with him last year at a dinner held by Marstone (where he is chairman), I was given a first-hand education as to why ETFs — which have assumed their place in the millennial hall-of-fame alongside toast points, craft beer and Patriot Act with Hasan Minhaj — are not always the right answer for investors.

Who is Kraus to say that? Well, Kraus worked at Goldman Sachs for 22 years (several of which were before Goldman’s 1999 IPO), ultimately co-heading the firm’s investment management division and chairing its strategy committee. He has also served as chairman and CEO of AllianceBernstein, and while he’s had his triumphs and challenges, one thing is beyond dispute: Kraus doesn’t need the money. As such, his consistent banging of the drum about the structural considerations of ETFs isn’t a case of a heavy-hitter talking their own book for economic gain. With Aperture, Kraus is looking to re-energize mutual funds and passionately push back against the idea that investors can’t beat the market. If you can pick talented managers, incentive them properly and target the right area, alpha, says Kraus, is still there for the taking.

Here’s my recent conversation with Kraus in Aperture’s New York office:

Gregg Schoenberg: What was the overarching thesis that led you to start Aperture?

Peter Kraus: I took a step back and looked at the financial ecosystem that’s been created over 50 years and the changes in that ecosystem. Then I asked myself the question of whether that system makes sense for the next 50 years, or if there was something that we’re missing.