When Hedge Funds Milk ETF Investors

When Hedge Funds Milk ETF Investors

Front-running index inclusions give hedge funds an opportunity.

Reviewed by: Lisa Barr
Edited by: Lisa Barr

LONDON − ETFs are great investments. They are low-cost and easy to understand. Yet, they are not without their drawbacks.

One well-known drawback is that hedge funds replicate indices and this means that if the index changes and drops a company from its membership while admitting another, ETFs become forced sellers of the dropped stocks and forced buyers of the newly included stocks.

This gives hedge funds an opportunity to front-run the ETF trades.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.

[This article originally appeared on ETF Stream.]

Joachim Klement is an investment strategist based in London working at Liberum Capital. Throughout his career, he has focused on asset allocation, economics, equities and alternative investments. Klement studied mathematics and physics at the Swiss Federal Institute of Technology in Zurich and graduated with a master’s degree in mathematics.