Why ETFs Are Slowly Killing Hedge Funds

May 20, 2015

Total global ETF and ETN assets are about to exceed total assets in hedge funds, which means now is the time to begin playing a funeral dirge for many hedge funds.

That may sound like an outrageous assertion, so let me ease into it by way of a bit of crucial background.

First, to be clear, there’s a big and growing intersection between hedge funds and ETFs. In other words, hedge fund use of ETFs is significant and is becoming more so. In an immediate sense, that means in the chart below, provided by Deborah Fuhr’s London-based ETF consultancy ETFGI, some double-counting of assets has been baked into the numbers.

But that fact doesn’t preclude culling some important insights from what Deborah Fuhr is predicting.

ETF Exposure Superior

Most obviously, many hedge funds have grasped that accessing huge pockets of the financial markets using single ETFs as opposed to dozens of individual securities makes complete sense. It’s certainly cheaper to execute a global-macro view this way.

The 13F filings that big hedge funds have to make with U.S. regulators lay this bare. Big ETFs such as the SPDR Gold Shares (GLD | A-100), the SPDR S&P 500 ETF (SPY | A-98) and the Vanguard FTSE Emerging Markets ETF (VWO | C-85) are frequently the top holdings at hedge funds like George Soros’ or Ray Dalio’s Bridgewater Associates.

And to the extent that ETF product offerings are becoming more precise and plentiful, there’s less and less to be gained from relying mainly on individual securities.

Add to that the increasing liquidity of ETFs that has come with their rapid adoption in recent years, plus the ways that illiquid ETFs can still be traded efficiently, and hedge funds of yesteryear that plied their trade using individual securities really look like dinosaurs.

In the end, with ETFs, the world is potentially every investor’s oyster now, and turning on a dime in terms of big strategy changes has never been easier than with ETFs.

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