David Barse Founded XOUT. An Ex-Business Partner Claims . . . Some Copying.
Inside the business split between Outvest founder Alec Ellison and ex-Third Avenue CEO David Barse.
When Alec Ellison left Jefferies to start Outvest Capital in 2016, his shtick was simple: Avoid dinosaurs failing to adapt to disruptive technology.
There was one problem. The longtime tech banker was trying to build an asset management business with no experience as an . . . asset manager.
But in what at the time seemed like a stroke of good fortune for Ellison, David Barse — the well-known former chief executive officer of asset manager Third Avenue Management — would soon join him as a business partner.
Yet after disagreements arose, Barse resigned and started index company XOUT Capital last year, according to Ellison.
That separation, and the resulting acclaim lauded upon Barse, is at the center of a disagreement between the two that now, for the first time, is spilling into the open — with Ellison claiming they had “multiple differences” in how to move Outvest forward, that the terms of their business partnership recognized Ellison as creator of the firm’s investing strategy, and that he coined the ticker XOUT for an exchange-traded fund that Outvest had planned.
“The only thing more important than what you put IN your portfolio is what you XOUT,” Barse’s XOUT says on its website.
“What makes us different?” Outvest says on its website. “The Outvesting Strategy — more important than what you put into your portfolio may be what you leave OUT.”
Ellison, 57, now says he formed Outvest in June 2016, and about a year later, the Greenwich, Connecticut-based firm began collecting outside capital.
The asset manager launched its Outvest Large Cap Fund on March 31, 2017, according to a filing with the Securities and Exchange Commission. While the filing indicates it’s a hedge fund, Ellison explains the investment pool was a long-only fund that followed his trademarked Outvesting strategy.
But the fund, which was wound down last year, had not been the firm’s sole approach to trying to build the business, according to Ellison. As Outvest continued garnering capital in 2018, he says the firm weighed “multiple avenues,” including creating an ETF.
“In this context, I coined the ticker XOUT, he told Institutional Investor in an email. “Similar to ‘Outvest,’ which I’d also coined, ‘XOUT’ had the attraction of also being able to be used as a verb, not only a descriptor. Our entire team felt it was a very clever name.”
According to Ellison, the New York Stock Exchange confirmed in March 2018 that it had reserved the ticker XOUT for Outvest. However, Ellison says that Barse handled the follow-up meetings with the NYSE. (A spokesperson for the NYSE declined to comment.)
Fast forward to today: XOUT is the ticker for the GraniteShares XOUT U.S. Large Cap ETF, the ETF that tracks the index developed by Barse’s firm and began trading on the NYSE Arca last October.
And while Outvest still exists, according to Ellison, the firm is no longer managing any money.
As Barse was leaving Outvest, Ellison says he was “very concerned” Barse might pursue the firm’s trademarked Outvesting strategy with a new partner. He says Barse repeatedly asked him to license Outvest’s intellectual capital in March 2019 — the month they decided they would end their business relationship. Ellison says he refused, particularly since he knew that Outvest’s senior research analyst, Ryan Giannotto, was joining GraniteShares.
“This was a red flag for me,” says Ellison, who is accusing Barse of “appropriating” the XOUT ticker. Ellison says he also feels “XOUT Capital copied the overall approach of excluding companies from an index based on vulnerability to technological disruption.” He says he can’t comment on the “degree of copying” as he has not reviewed “the specific algorithms that XOUT Capital is using.”
“I don’t think it appropriate for me to respond fully to Mr. Ellison’s persistent disparagement of XOUT Capital,” Barse responded in an email when presented with his former partner’s claims. “Suffice it to say that the only similarity between the services offered by” Outvest and XOUT, Barse said, “is the general investment philosophy of eliminating from consideration companies that might be subject to technological disruption.”
But Barse had a bit more to add on the matter.
“Mr. Ellison has been banging this drum for more than a year now to no avail,” said Barse. “And nothing prevents him or Outvest Capital from pursuing any investment strategy they think appropriate.”
“I retired to form an investment management business to develop what I termed the ‘Outvesting strategy’ — the concept that a compelling way to capitalize on the impact of accelerating technological change across all industries was to ‘flip’ the investment process,” Ellison said in an email.
Instead of investing in companies seeking to be leaders in technology, Ellison wanted to exclude industries and companies “most unable or unwilling to adapt to accelerating technological change.” He says he developed the strategy after being immersed for almost 30 years in tech.
By mid-May 2016, Ellison says he began meeting with potential backers, investors, strategic partners, and others within asset management, including heads and partners of major hedge funds. He says he first met Barse on August 18, 2016, through an introduction by a mutual friend, and described Barse as “very intrigued with the strategy.”
“We met multiple times over the next several months and began to discuss David partnering with me,” Ellison says. In late November 2016, they decided to “move forward together,” with Ellison as chief investment officer and Barse running the business side of the firm while helping to raise capital from his network. As CIO, Ellison explains that he was to keep “developing and refining the strategy.”
By March 2017, they had negotiated terms of an agreement. Barse joined Outvest as a “member,” meaning as an owner of the firm, according to Ellison. As the only two members, he says they contributed equal capital to the business operations as well as equal capital to the fund. But they weren’t equal partners, as Ellison owned two-thirds of Outvest.
“In recognition that I had created the strategy, the economic split of Outvest Capital was 66 percent to 34 percent in my favor, and I was the sole manager,” says Ellison.
The business partners moved into office space leased in Greenwich in March 2017, and by June of that year Ellison says Outvest “received outside capital from what would be the first of many investors.” He says the minimum investment was $250,000.
“Technology creates tremendous investment opportunities,” a video Outvest used to describe its strategy says. “While most investors are competing to identify the next Google or Facebook, there’s a less crowded and more diversified way to play this investing theme.”
The two-and-a-half-minute video goes on to explain the “Outvesting deselection process,” which begins with all the stocks in an index and works backward by determining what to exclude. The index is divided into more than 30 industry groups, with Outvest’s “proprietary framework” determining which are advantaged — or disadvantaged — by technology.
“Companies in disadvantaged industries face high hurdles to make it into the portfolio,” the video says. “The result is a diversified, cross-industry portfolio that was built with the risk of technological change in sharp focus.”
Outvest had begun attracting interest from potential strategic partners by the end of 2017, according to Ellison, who says they saw “the scalability of the opportunity and the possibility of creating a trademarked category, not just a single fund.” Ellison trademarked “Outvest” and “Outvesting” in September 2016, and says he licensed them to Outvest Capital.
The firm considered “licensing the output of the Outvesting strategy to a major hedge fund,” according to Ellison. “We entered into such a paying relationship in August 2018,” he says, adding that it lasted for about five months.
But in early 2019, “David and I had multiple differences over how to take the business forward,” Ellison says. “We could not come to an agreement.”
They decided to wind down the Outvest Large Cap Fund, selling all of its positions in March 2019 and returning all capital to investors by late April of that year, according to Ellison. He says that “Outvest Capital continues to exist but does not currently actively manage capital.”
Barse formally resigned from Outvest on April 3, 2019, says Ellison. The following month, Ellison became U.S. chairman of OurCrowd, an equity crowdfunding website for startups that is led by venture capitalist Jonathan Medved. Last year, Outvest also saw its research analyst Giannotto leave to join GraniteShares — the ETF provider that has a licensing agreement with Barse’s firm to use the XOUT index.
Ellison says Giannotto was among Outvest’s hires in 2017. Giannotto’s LinkedIn bio shows he was a senior research analyst at Outvest from December 2017 until March 2019, when he joined GraniteShares as director of research.
“Ryan was terminated by Outvest’s Ellison — he did not choose to leave the company,” according to a spokesperson for GraniteShares, who also handles media queries for XOUT.
By March 2019, Outvest had begun unraveling.
“We had indicated to the team we were winding down the fund,” says Ellison. “But I was shocked on learning how quickly Ryan Giannotto, our senior research analyst, had secured the job of director of research at GraniteShares, an ETF firm.”
GraniteShares and Giannotto declined to comment on the reservation process for the ticker XOUT and its ties to Outvest, according to the spokesperson for the New York-based ETF firm. The spokesperson said in an email that “generally, GraniteShares doesn’t want to weigh in on the issue between Barse and Ellison.”
In a separate email, the spokesperson pointed to the NYSE as controlling the process of assigning tickers: “Someone would likely not be able to appropriate or hijack a ticker without the proper channels at NYSE approving.” The spokesperson said that Barse had no comment on Ellison’s accusation that the XOUT Capital founder appropriated the ticker that Ellison claims to have coined and says was reserved for Outvest.
The U.S. has a uniform system for picking tickers, a document on Options Clearing Corp.’s website shows. Under the national market system plan for the selection and reservation of securities symbols, initial requests for securities symbols may be “perpetual” or “limited-time” reservations. Limited-time reservations extend for 24 months and may be voluntarily released by a party, the document shows.
Barse’s LinkedIn page does not cite Outvest as part of his experience. The XOUT chief executive officer has moved on, and Outvest, it seems, has been X’d out.
Ellison says his work in technology investment banking spanned almost three decades, starting at Morgan Stanley and including such senior roles as president of Broadview International — an advisory firm focused on tech mergers and acquisitions that was bought by Jefferies Group in 2003 — and vice chairman of Jefferies before his retirement in March 2016.
It’s not hard to imagine why Ellison would want to meet with Seides, who has long worked in the asset management industry. Seides’s podcast is a core part of his firm, Capital Allocators, and he previously co-founded Protégé Partners, an alternative asset manager that invests in small hedge funds. It was there that Seides became well known for his firm’s bet with Warren Buffett, who had wagered that the S&P 500 index would beat five funds of hedge funds selected by Seides over the decade through 2017.
Buffett won the bet with Protégé, underscoring the tough competition active managers have faced from low-cost index funds. It’s a battle for market share that Ellison’s former business partner Barse understood well.
Barse told II in August that in his former role as CEO of Third Avenue, he faced a “constant war that I was losing to the passive strategies that were both outperforming and gathering assets.” He said, “It’s really hard to pick winners, and it’s really, really hard to do that consistently.”
With his founding of index company XOUT, Barse said he had concluded it’s probably easier — and more important — to focus on what to leave out from a portfolio than what to include. XOUT’s investment formula weeds out the losers among the 500 largest U.S. stocks based on market value, he said, explaining that the selection process considers technology risks.
The ETF that tracks the XOUT U.S. Large Cap Index began trading about a year ago and has soared. The GraniteShares XOUT U.S. Large Cap ETF rose 15.9 percent this year through October 27, beating the S&P 500’s gain of 4.9 percent.
The XOUT U.S. Large Cap Index uses “a proprietary quantitative rule-based methodology” to identify which companies to exclude — or “XOUT,” Barse’s firm says on its website. EQM Indexes last year announced it collaborated with XOUT to create the index, and pointed to an introductory video of XOUT posted on EQM’s website that explains its investing strategy in about a minute and a half.
“XOUT strategically attacks two of the most important issues in today’s investing marketplace,” the video says. The firm tackles “the rapid and accelerating impact of technological disruption that is affecting companies in all industries.” And it “exposes passive indexes’ most obvious failure: buying every stock in the index — even the stocks in long-term secular decline.”
According to Ellison, Outvest also created a video describing its strategy, hiring a videographer in 2017 for the script he wrote and narrated. That video — which also illustrates its strategy with a handheld marker drawing on a white backdrop — similarly points to a “well-known flaw of indexing,” explaining that “the index buys everything in a market and lifts all companies, even those in long-term decline.” And it describes today’s unprecedented pace of technological change as a “dizzying” force that is “swamping all industries and must be skillfully addressed.”
That’s where Ellison’s investing strategy comes in.
“The Outvesting Strategy . . . Because no industry is immune from the accelerating pace of technological change,” his firm says on its website. Instead of focusing on “winners,” the firm turns traditional investing inside out by screening out the “disruptees” least able to adapt.
The index company that Barse started soon after leaving Outvest also flips the notion of how alpha — or market-beating returns — is produced. “The XOUT approach turns the concept of alpha generation upside down, adopting the investment premise that it is easier to exclude losers than to pick winners,” EQM said last year in the announcement on its collaboration with the firm Barse founded.
GraniteShares CEO Will Rhind, in announcing the launch of the GraniteShares XOUT U.S. Large Cap ETF last October, called XOUT’s approach a “unique investment idea.” Maybe so. But Seides recalls hearing the concept from Ellison in 2016, before Barse joined him at Outvest.
The ETF that tracks Barse’s firm’s index is performing well in 2020, and in celebrating the fund’s one-year anniversary, GraniteShares announced this month it has gathered more than $78 million in assets under management.
Meanwhile, Outvest is no longer managing money. “What remains is the intellectual property, including but not limited to the trademarks, methodology, and algorithms,” Ellison says.
As for any Outvest echoes in XOUT, Barse considers the sole similarity in services provided by the two companies — “a managed investment fund in Outvest Capital’s case, albeit one that no longer functions as such, and an index in XOUT Capital’s case” — to be a “general investment philosophy” eliminating companies potentially subject to technological disruption, according to his email to II.
But as Ellison looks at XOUT, he recalls the two years Barse was his business partner at Outvest — and sees, at least to some degree, a copy of his firm’s approach.