Hedge fund ETFs in focus

Mar 21st, 2017 | By | Category: Alternatives / Multi-Asset

The hedge fund industry experienced its fastest rate of fund closures last year since 2008, according to a report from Hedge Fund Research, leading many investors to explore similar strategies through alternate vehicles, including ETFs.

Kenneth Heinz, President of Hedge Fund Research

Kenneth Heinz, President of Hedge Fund Research.

Despite a capital market bull-run in the US for approximately eight years and generally positive equity performance around the world last year, Hedge Fund Research found that a total of 1,057 hedge funds closed in 2016. Far fewer – 729 – hedge funds were launched over the same period.

The hedge fund industry still represents $3.02 trillion in assets, but are losing ground to ETFs which overtook hedge funds in terms of AUM in July 2015, according to ETFGI data.

For European-based investors there are several passive funds that, although costing more than mainstream equity exposures, seek to generate higher returns than traditional market capitalisation-weighted indexes through exploiting risk factors and making short and leverage plays.

The $36 million UBS ETF HFRX Global Hedge Fund Index UCITS ETF (SIX: HFEUAS) tracks the HFRX Global Hedge fund Index which is designed to be representative of the overall composition of the global hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry.

The ETF synthetically replicates the performance of the index with the use of a swap, costs 0.34% per annum, and is up 0.53% year to date in euro terms.

There is also the $105m db X-trackers Hedge Fund Index UCITS ETF (Munich: XHFI), which tracks an index of hedge fund strategies including equity long/short, event-driven, global macro and credit. It is down 1.6% year to date in euro terms and costs 0.90%.

Both ETFs’ fees are considerably lower than the average cost for a hedge fund, found to be 1.48% per annum in 2016 (down one basis point from the previous year) according to Hedge Fund Research. This represents almost double the average UK-based equity actively managed fund, and more than four times the average fee of an equity ETF in Europe.

ETFs also allow users to adopt these strategies without the usual high minimum investment amounts required by hedge funds.

Performance for hedge funds was also a mixed bag. The top decile had average performance last year of 32.7%, but the bottom decile saw negative returns on average of 15.5% in the same timeframe.

In 2016, all of the 30 equity-focused hedge fund strategies listed in the report, bar one, fell short of the return on the US bellwether S&P 500 with dividends.

Even in sectors which have seen soaring returns so far this year, hedge funds have often failed to generate superior returns than ETFs.

For example, the Hedge Fund Technology Index has seen returns of just over 4% year to date, yet the tech-focused PowerShares QQQ Trust Series 1 Fund (NASDAQ: QQQ) has returned 11.5% in that time in USD terms.

Similarly the HFRI Emerging Markets (Total) Index only generated 4.7% year to date, yet the iShares MSCI Emerging Markets UCITS ETF (LON: IDEM) has produced more than 12% since 1 January.

However, according to Kenneth Heinz, President of Hedge Fund Research, conditions are ripe for strong industry performance:“Continuation of the process of macroeconomic normalization is likely to drive strong performance across a wide range of strategies in 2017,” he said.

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