ETFs surpass hedge funds in AUM

Jul 21st, 2015 | By | Category: ETF and Index News

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Exchange-traded funds have reached another milestone, overtaking the hedge fund universe in terms of assets under management (AUM), reports ETFGI, a specialist research and consultancy firm focused on ETPs.

According to ETFGI, the total AUM of the over 5,800 globally listed ETFs reached $2.971tn at the end of June. A similar report into the global reach of hedge funds, released by Hedge Fund Research Inc in Chicago, revealed total AUM of $2.969tn.

Greater asset levels recorded in ETFs than hedge funds

Strong ETF growth rates have expanded the ETF global asset base beyond the quantity backing hedge funds

While hedge funds have a longer history (some would perhaps argue their inception originated in the 1920s bull market in the US), ETFs have enjoyed a recent history of heavy proliferation. According to Deutsche Bank, the growth of global ETF assets averaged 28% per annum over the 10 year period to 2014.

The market is largest in the US, with US-listed ETFs (the main exchanges are NYSE, Nasdaq and BATS) accounted for 73% or nearly $2tn in AUM at the start of 2015. European-listed ETFs are expanding rapidly, though, with expected growth between 15%-20% for this year.

Emerging /developing countries, still largely untapped on any scale, potentially offer massive growth opportunities for the ETF industry.

Two of the biggest factors that will affect the growth rates of ETFs in the future include establishing an efficient centralised settlement system in Europe (cross-border settlements can currently cost up to five times the price of settlement in the US), and reducing liquidity concerns in emerging markets.

ETFs have become increasingly popular due to a number of inherent structural characteristics: low costs, transparency and reliable index tracking. Lower costs, especially compared to hedge fund fees, are a clear benefit of these instruments. According to ETFGI, the average expense ratio for an ETF is 0.31%. Hedge funds typically charge an annual 1.5% of AUM and charge an average performance fee of 20%, although this could be as high as 50%. This has prompted Warren Buffett to call the fee structure “grotesque”, arguing that it incentivises managers to take on undue risk.

Despite this high fee structure, many experts show that hedge funds often don’t deliver their expected returns. “What hedge funds say they’re going to do is give you better performance,” says Deborah Fuhr, founder and managing partner of ETFGI. “You’re paying a lot more money and, often, you’re not getting high alpha relative to the market.” This can be especially true in strong bull markets.

Typically, the types of investors who use ETFs or hedge funds are quite distinct. Whereas ETFs are used broadly by a wide range of institutional and retail investors, hedge funds have historically been used by sophisticated, “qualified” investors only. However, ETFs that replicate the performance of hedge funds have also been created, allowing investors to gain hedge fund-type exposure, but at lower costs.

Both sectors continue to see increased investor demand, although current ETF growth and prospects far surpass that of hedge funds. In the first half of the year, hedge funds netted $39.7bn of new assets while ETFs recorded net inflows of $152.3bn.

Most industry commentators expect ETFs to quickly pull ahead and extend their lead over hedge funds.

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