The investment landscape is undergoing a significant transformation, with an increasing number of hedge funds and family offices converting their portfolios into tax-efficient exchange-traded funds (ETFs). Leading this change is Wes Gray, the founder of ETF Architect, who has already played a key role in pioneering the first conversion of a hedge fund into an ETF. Now, Gray is gearing up for a wave of tax-advantaged ETF deals that could reshape the way investors approach portfolio management and tax efficiency.
Gray’s Vision for a Tax-Friendly ETF Revolution
Wes Gray’s firm, ETF Architect, has been at the forefront of helping hedge funds and investment managers navigate the complexities of converting traditional portfolios into ETFs—structures that provide tax efficiency while making the underlying assets more accessible to retail and institutional investors alike. Since 2019, ETF Architect has assisted in converting over 50 funds into ETFs, a strategy gaining momentum as stock prices have surged in recent years.
The growing popularity of tax-efficient ETFs has fueled the firm’s growth, particularly with the success of Gray’s Treasury-bill ETF, launched in 2022. The innovative fund uses options strategies to help holders minimize federal tax bills. Since its inception, this product has attracted nearly $5 billion in assets, reflecting the increasing demand for tax-efficient investment vehicles.
Now, Gray predicts that 2025 will see an acceleration in the conversion of hedge funds and family offices into ETFs, driven by the demand for tax-skirting financial products. Gray projects that his firm will handle at least 15 more hedge fund-to-ETF conversions, representing around $5 billion in assets—five times the volume of conversions completed in 2024.
A New Trend: Tax-Skirting Hedge Fund Conversions
The tax advantages offered by converting hedge funds into ETFs are becoming a focal point for large investors. One of the key methods for facilitating this process is the 351 conversion. Under section 351 of the Internal Revenue Code, investors can convert their portfolios into ETFs without triggering taxable events, such as capital gains taxes. This allows investors to unlock tax savings, making it an appealing strategy for those seeking to preserve wealth and minimize tax burdens.
Gray has already completed several successful 351 conversions, including a high-profile $800 million deal with Carlson Capital Management, which was finalized in 2024. The deal demonstrated the power of converting traditional investment vehicles into ETFs, offering a wider range of tax advantages while increasing the portfolio’s liquidity and accessibility to broader market participants.
Such conversions are gaining traction across the investment landscape. Hedge funds, in particular, have seen the benefits of converting their portfolios into ETFs, which can be traded on major exchanges, providing greater liquidity, transparency, and tax efficiency for both the managers and investors involved.
Why Hedge Funds Are Turning to ETFs
The move towards ETF conversions has been motivated by several key factors. First, ETFs are known for their tax efficiency compared to traditional mutual funds or hedge funds. They allow investors to avoid the taxable capital gains that often arise when mutual funds or hedge funds rebalance their portfolios. In an environment where tax rates on investment gains can be high, the ability to reduce tax liabilities has become a critical strategy for large institutional investors and family offices.
Additionally, ETFs offer more flexibility and liquidity compared to traditional hedge funds. Investors can trade ETFs on stock exchanges, unlike hedge funds, which often require investors to lock up their capital for extended periods. By converting their portfolios into ETFs, hedge fund managers can provide better access to their investors while also attracting new ones.
The growing appeal of ETFs among institutional investors and the increasing acceptance of these structures in mainstream investment strategies have encouraged hedge funds to explore ETF conversions as a viable route to maximize returns while maintaining tax efficiency.
The Growing ETF Conversion Market
The market for hedge fund conversions to ETFs has evolved significantly since the first such transaction was completed by ETF Architect in 2020. At the time, the firm converted the tech-heavy portfolio of hedge fund Upholdings into an ETF, setting the stage for other funds to follow suit. The success of this initial conversion helped illustrate the value proposition of the ETF structure for hedge funds seeking more tax-efficient and scalable investment solutions.
Since then, Gray and ETF Architect have completed numerous other conversions, with the Carlson Capital deal marking one of the largest of its kind. Gray has noted that these types of conversions have become more frequent, signaling a broader acceptance of ETFs among hedge fund managers.
“Every single hire, everything we do, our focus as a firm is on how to facilitate 351 conversions cheaper, faster, and more transparently,” Gray said. This focus on efficiency is helping Gray’s firm stay ahead of the curve as demand for tax-efficient ETF solutions continues to grow.
Gray’s projection that his firm will handle 15 more ETF conversions by the end of 2025 suggests that this trend is just getting started. These conversions are expected to encompass a wide range of asset classes, from equity-focused funds to more niche strategies, such as commodities and fixed income.
Tax Efficiency and the Future of ETFs
The future of hedge fund-to-ETF conversions looks bright as tax efficiency becomes a critical factor in portfolio management. Investors are becoming increasingly aware of the significant tax savings that can be realized through ETF conversions, particularly with the potential for capital gains deferral and the minimization of tax bills.
As more funds make the switch to ETFs, the broader financial landscape is likely to see an increase in the number of tax-efficient investment vehicles available to investors. Gray’s firm, ETF Architect, is leading the charge, but other firms are likely to follow suit as the benefits of these conversions become more widely recognized.
The convergence of tax-savings strategies, improved accessibility, and investor demand for liquidity and transparency is set to drive further growth in the ETF market. In particular, the 351 conversion process, which enables tax-free portfolio restructuring, is poised to be one of the key catalysts for this shift.
Conclusion
As hedge funds and family offices seek to optimize their investment strategies for tax efficiency, the conversion to ETFs is becoming a viable solution. Wes Gray and ETF Architect are leading the way, helping investors access the benefits of tax-efficient investment vehicles. With growing demand for tax-friendly solutions and increased interest in ETFs, the market is poised for continued expansion.
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