Hedge Fund Wants More Global ETFs

February 04, 2014

Filling the ETF void in emerging and frontier markets.

The ETF universe currently comprises some 1,500 funds covering markets around the world ranging from China A-shares equities to emerging market debt. But one fledgling hedge fund manager who mostly uses ETFs thinks the ETF space can use even more funds.

That matters for smaller hedge fund managers, such as Gezinus Hidding, portfolio manager of the $2.5 million Dial Fund L.P. Hidding’s hedge fund is made up almost entirely of regional ETFs, and speaking with ETF.com staff writer Hung Tran on the sidelines of the Inside ETFs conference last week, Hidding said he’s keen on seeing new ETFs for him to use, such as a fund focusing on small-cap Mexico stocks.

ETF.com: Would you give us a bit of background on yourself and your fund?

Hidding: I’m also a professor at Loyola University Chicago and have been investing my own account for 25 years. A few years ago, people approached me and asked if I could implement my strategy for them too. I developed a strategy that I called a global macro value-oriented strategy.

It’s global and very diversified in equities as well as bonds. What I try to do is invest in regions of the world, including Europe, U.S. and Latin America. I don’t invest in individual stocks at all, so I mostly invest in ETFs that invest in regions.

Ideally, I’d like to equal-weight across the regions. The fund is called DIAl Fund 1 and I manage $2.5 million, just starting out a year and a half ago. I am probably 90-95 percent invested in ETFs these days, with a few mutual funds mixed in.

ETF.com: What particular ETFs are you currently invested in?

Hidding: I have roughly 25 percent invested in the U.S., and I am in the WisdomTree SmallCap Earnings Fund (EES | A-81). In Latin America, I’m in the First Trust Latin America AlphaDex ETF (FLN | F-39), and in China, I’m in the Guggenheim China Small-Cap ETF (HAO | C-24).

I’m finding pockets of the world where I don’t find many ETFs, such as Mexico small-cap ETFs. There is big potential for Mexico because it’s close to the U.S. and because of the sweeping new energy policy. I like small-caps, because over time, small-caps outperform large-caps.

Latin American bonds is another area that is lacking. From Mexico down to the southernmost point in South America, there is one ETF, the Market Vectors Emerging Markets Aggregate Bond (EMAG), which has changed strategy to be an emerging market bond fund. I’m trying to cover a broad market of bonds.



Hidding (cont'd.): However, there’s a long list of European bond funds for European investors, but I can’t go European high yield here. Also, many people are saying that Africa will be the fastest-growing region in the world in the next few decades.

There are a few funds focusing on Africa, the Middle East and North Africa. But again, it's not like there’s a list that I can choose from. I’m very much with providers who say that the ETF industry is relatively young. The field is clearly expanding, and you’ll see more offerings from more parts of the world.

To me, these are exciting times, because there are still some pockets I cannot fill in with ETFs. But, over time, I think it will come. Typically, if there are no country-specific ETFs, I will use an emerging market or frontier market fund as a proxy.

ETF.com: As a small hedge fund manager, what do you find most attractive about ETFs?

Hidding: To me, ETFs give targeted geographical strategies that would be near impossible to build as a small hedge fund. But even if I were a midsize fund, would I put together a portfolio of African stock funds as part of my overall portfolio? Probably not.

Unless I am a huge hedge fund, I would not build a bond portfolio for targeted maturities, but there are folks who do that, so I just piggyback on their expertise.

ETF.com: Some investors would question why others can’t put together a portfolio of their own ETFs without paying high hedge fund fees for it.

Hidding: Anybody could do it, because I did for 15 years. But many people don’t because many people aren’t into investing, and that’s my job. There are also some clients who want to focus on finance but find they’re not that good at it. They’re always worried about the market. I’m a long-term investor, so I’m not worried about the market.

The U.S. has had 100 years or more of trading history, with an average of 7 to 8 percent of annual growth for long periods, so you have to be patient in knowing if something is coming off the rails or not.

ETF.com: Also, where does the “hedge” come into focus here within the fund?

Hidding: I don’t hedge in the traditional sense in terms of buying options and derivatives. Where I hedge is in volatility, which is my friend. Some parts of the world will be up or down. So I take profits in areas of the world where I’ve done well and include it into places where I have not done well, because over time, mean-reversion will happen.

But over time, you can collect 100 to 200 basis points just by careful rebalancing. I rebalance twice a year: once in November and also in May, which is just after tax season.


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