Founded in early 2016 by brothers Vincent Dilling-Larsen and Christian Mørup-Larsen, Danish fund boutique Othania built its foundation on a proprietary risk model, “Tiger,” which originally guided monthly shifts between equity and bond Exchange Traded Funds (ETFs). In recent years, the firm has broadened its offering to include funds with more diversified exposure across asset classes, increasingly incorporating more alternative ETFs that offer exposure to commodity, precious metails and trend-following CTAs. This shift was driven in part by the limited diversification benefits of bonds during the prolonged low interest rate environment.

“Our first funds offered simple exposure to traditional asset classes such as bonds and equities,” recalls co-founder and CIO Vincent Dilling-Larsen. “But back in 2021, with so many bonds carrying negative negative yields, we started building our multi-asset fund. We needed to solve the problem of holding bonds with expected negative returns.” That question led Othania to search for true diversifiers to both stocks and bonds.

“We spent a lot of time going back and searching for real diversifiers, and CTAs and other alternative exposures clearly stood out,” says Dilling-Larsen. The team began allocating to CTA managers, gold, and commodities to build more robust portfolios. Even as rising rates and inflation renewed the case for bonds, Othania continued to incorporate alternative exposures into its strategies. “Our all-weather strategy, for instance, has a more static allocation to these alternatives,” explains Dilling-Larsen.

ETFs: Passive in Name, Active in Practice

While many investors still view ETFs as purely passive vehicles, Dilling-Larsen stresses that active choices lie behind almost every index. “A lot of investors think ETFs are passive simply because of the name or the way they were marketed early on,” he notes. “But if you look closely, passive really just means market-weighted or equal-weighted. Every other index represents an active decision by some researchers, whether that’s value, momentum, or a particular fixed income structure.”

“A lot of investors think ETFs are passive simply because of the name or the way they were marketed early on. But if you look closely, passive really just means market-weighted or equal-weighted. Every other index represents an active decision by some researchers…”

This is why Othania scrutinizes ETFs with the same rigor applied to active mutual funds. “Even with simple fixed-income ETFs, we spend a lot of time looking into the index composition,” says Dilling-Larsen. “And it becomes even more important with commodity ETFs. Many products have ‘oil’ in their name, but their exposure is very different from spot oil prices. We need to make sure we get the right exposure.”

“We spend a lot of time talking to ETF managers before investing, conducting the same level of due diligence as one would with any active manager.”

As an asset manager investing in ETFs, Dilling-Larsen does not draw a sharp line between ETFs and active mutual funds when it comes to due diligence. “We spend a lot of time talking to ETF managers before investing, conducting the same level of due diligence as one would with any active manager,” he explains. “We also prefer to have regular calls – every six months or every year – and we monitor performance on a weekly basis to identify any deviations from our expectations.” Where there is an active manager behind the ETF, the Othania team strives to maintain a close dialogue to understand both how the product is structured and what drives its performance.

Europe versus the US: A Tale of Two ETF Markets

Dilling-Larsen highlights significant differences between the ETF universes in the US and Europe, driven largely by regulation. “In the US, regulation has opened up tremendous opportunities. Many mutual funds have converted into ETFs, providing investors with greater liquidity,” he explains.

In Europe, by contrast, the UCITS framework has limited innovation. “Here, we’ve mainly seen thematic ETFs gain traction, first ESG, then healthcare, and now defense. But UCITS makes it difficult to launch truly innovative or alternative products,” says Dilling-Larsen. “Innovation in Europe often just means putting an active portfolio into an ETF wrapper with a theme attached.”

“In the US, there are a lot of really exciting ETFs in the alternatives space which, for different reasons, aren’t available in UCITS format yet.”

Regulation has created a pronounced gap in the availability of alternative ETFs between the US and Europe. “In the US, there are a lot of really exciting ETFs in the alternatives space which, for different reasons, aren’t available in UCITS format yet,” observes Dilling-Larsen. While Othania primarily relies on CTA ETFs, seeing them as dependable diversifiers alongside commodities and precious metals, he also identifies potential in “very strong long-short and merger arbitrage strategies,” which could act as genuine diversifiers.

Some commodity ETFs, whether in Europe or the US, may incorporate active elements in their design, but Othania generally treats them as straightforward exposures to the commodity or precious metals sectors. “For now, we don’t pursue any highly active strategies within that space,” adds Dilling-Larsen.

CTAs as Core Diversifiers

Othania has come to see CTA ETFs as a crucial source of diversification alongside traditional equity and bond exposures. When comparing traditional trend-following strategies with their ETF counterparts, Dilling-Larsen acknowledges the common critique that CTA ETFs often use fewer instruments than mutual funds or other structures. In practice, however, he finds the difference negligible.

“Across all the CTA ETFs I monitor and decompose, I don’t find any meaningful difference. Of course, each has its nuances, but I can’t say that those using 10 instruments are better or worse than those using 20.”

“Across all the CTA ETFs I monitor and decompose, I don’t find any meaningful difference,” says Dilling-Larsen. “Of course, each has its nuances, but I can’t say that those using 10 instruments are better or worse than those using 20,” he explains. “And even going beyond 100 instruments doesn’t, in my view, make a significant difference.”

Cost, Liquidity, Transparency – and the Future

At the core of Othania’s reliance on ETFs – traditional and alternative – are three key attributes: cost, liquidity, and transparency. Looking forward, Dilling-Larsen expects innovation in ETFs to continue coming out of the US. “That’s where regulation is most flexible, and that’s where we see the most exciting products being launched. Many US managers are trying to bring these strategies to Europe, but adapting them to UCITS is time-consuming and costly,” he observes. For now, the innovation will remain US-led. “Hopefully, Europe will eventually get to a place where investors can benefit from these products in a UCITS or similar listed format.”