Global ETF Assets Surpass Hedge Fund Assets

Debbie Fuhr called this one: global ETF assets would surpass hedge fund assets by the end of the second quarter. She forecast that in January, and here we are. It happened.

According to data from ETFGI, the independent consultancy she leads, global ETF assets exceeded $2.97 trillion at the end of June, about $2 billion more than hedge fund assets.

To be fair, a different data provider, HFR Hedge Fund Research, pegged total hedge fund assets at the end of June at around $2.97 trillion as well. The research group noted that hedge funds have been breaking asset records for the past 11 consecutive quarters.

The challenge here is that compiling hedge fund asset figures is tricky business since the data is self-reported. Fuhr argues that HFR’s numbers are slightly inflated. Either way, we are looking at asset parity with a slight edge to ETFs.

The takeaway here is that the 22-year-old ETF industry now commands more assets than the 66-year-old hedge fund industry.

No Alpha Here

The numbers don’t suggest that investors are shifting their assets from hedge funds into ETFs. They do tells us that investors are—in increasing numbers, and at a faster pace—recognizing the cost-effectiveness of ETF investing and the benefits of the ETF wrapper, Fuhr said.

These benefits have been particularly evident given hedge-funds’ failure to deliver the promised alpha in exchange for a higher price tag.

“In the past six years, every year, hedge funds on an asset-weighted basis have not beaten the S&P 500,” Fuhr said. “In the past 15 years, they’ve beaten it only in six. You are paying a lot of money for that alpha, which hasn’t consistently been there.”

Institutions Turning To ETFs

Part of the accelerated adoption of ETFs is tied to growing institutional demand for the strategies. Today, ETFGI estimates that institutions account for about 56 percent of U.S.-listed ETF assets, and 55 percent if you include other exchange-traded product structures.

“Many people don’t realize that institutions are increasingly seeing ETFs as a cost-efficient alternative,” she said. “The use of ETFs if growing faster than the use of hedge funds.”

And how much of ETF assets is actually owned by hedge funds? That's a tougher number to get at because many hedge funds don't report their holdings. Still, Fuhr estimates that number was just below $30 billion at the end of the 2014 based on what's reported.

In the U.S., equities ETFs represent roughly 80 percent of total assets, while fixed income ETFs are at about 15 percent—or $332 billion, as of July 20.