Hedge fund ETFs take a battering

May 26th, 2016 | By | Category: Alternatives / Multi-Asset

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It was a blow for the hedge fund world when Hillary Clinton’s son-in-law Marc Mezvinsky announced he would be closing his Greek-focused fund after it plummeted in value by 90%, just two years after it launched.

The £34 million UBS ETF HFRX Global Hedge Fund Index UCITS ETF (UC19), which tracks 38 hedge funds, costs 0.60% and is down almost 9% in the last year in US dollar terms.

The £34 million UBS ETF HFRX Global Hedge Fund Index UCITS ETF (UC19), which tracks 38 hedge funds, costs 0.60% and is down almost 9% in the last year in US dollar terms.

For passive investors, the news was a stark reminder that hedge funds come with a lot of risk, especially when they are making big bets on a single market.

ETF assets, now at around $3.13tn, according to ETFGI data, beat that of hedge funds for the first time ever last summer, and are continuing to grow as more investors recognise a more efficient, low cost and transparent way of investing.

The catch-up in the two markets is considerable as hedge funds have been around in the US since 1949, ETFs have been around since 1989. In Europe, the market is even younger with ETFs present for only two decades.

In the ETF world, hedge fund strategies have also lost favour. The db Equity Strategies Hedge Fund Index UCITS ETF recently delisted after it had whittled down to less than £10 million in assets and charged high fees of 0.90%. A disappointing end for a fund that launched in 2011.

For investors that want to diversify their portfolio and dabble in hedge fund strategies, there are only two such funds in Europe. They have suffered negative performance over the past year and charge relatively high annual fees compared to other equity ETFs.

The £34 million UBS ETF HFRX Global Hedge Fund Index UCITS ETF (UC19), which tracks 38 hedge funds, costs 0.60% and is down almost 9% in the last year in US dollar terms.

There is also another option from db X-trackers. The £292 million db Hedge Fund Index UCITS ETF (XHFD), which tracks an index of hedge fund strategies including equity long/short, event-driven, global macro and credit, is down 7.3% in a year. It charges even more at 0.90%.

Even heavyweight hedge fund ETF, the Global X Guru ETF (GURU), which tracks an equal-weighted index that attempts to mimic concentrated equity positions taken by large hedge funds (as reported in public filings), has seen its assets drop by 81% over the last two years to $90.75m (£62m), according to data from ETF.com. Launched in June 2012 it hit $500m in AUM in 2014 and is the cheapest of these ETFs at 0.75%.

In 2014 Global X launched two new ‘GURU’-themed ETFs – the Global X Guru Small Cap Index ETF (GURX) and Global X Guru International Index ETF (GURI).

But despite poor performance and high fees, hedge funds remain a very common investment among retirees, and they might not even be aware of it.

New research from wealth manager SCM Private has revealed that 4.8 million people in the UK are invested in hedge funds via their pension schemes and are being charged around 36 times the fees and are receiving as little as one third of the performance of low-cost passive index funds.

According to Hedge Fund Research data, most hedge fund strategies are down in terms of returns over 12 months in US dollar terms, and it is a very mixed bag year-to-date, from positive 0.34% for the HFRI World Index to negative 3.81% for the HRFI Fund of Funds Strategic Index. Niche strategies, which are less diversified and therefore more risky, are mostly in the red YTD.

Almost £3 billion in fees were paid from pension pots to hedge fund companies in 2015 alone, added SCM, despite just 6% of the average UK pension fund being allocated to hedge funds.

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