ETFs Overtake Hedge Funds in Asset Stakes

Despite the relentless push to passive, investor assets in the sector have only just moved ahead of those held by hedge funds.

Assets invested in exchange-traded products surpassed those held in hedge funds at the end of June, according to research.

ETFGI 1Sources: ETFGI, Hedge Fund Research HFRSome $2.971 trillion was held in exchange-traded funds (ETFs) and other products (ETPs) at the end of the month, overtaking the $2.969 trillion invested in hedge funds by $2 billion. Data on the two sectors was provided by ETFGI and Hedge Fund Research respectively.

“This is a significant achievement for the global ETF/ETP industry, which just celebrated its 25th anniversary while the hedge fund industry has existed for 66 years,” a report by ETFGI said. “The ETF/ETP industry [has] been gaining on the assets invested in the hedge fund industry, more notably since the financial crisis in 2008.”

The data showed ETPs in general had seen larger inflows—from all sectors of the investor universe—than hedge funds in recent years. For example, ETPs saw global net inflows of $152.3 billion in the first half of 2015, compared to $39.7 billion that moved into hedge funds.

ETFGI said investors had become disappointed with hedge fund returns after the sector had, on average, failed to beat the S&P 500 index.

“With the positive performance of equity markets many investors have been happy with index returns and fees,” ETFGI said. “This situation has benefited ETFs/ETPs, which offer an enormous toolbox of index exposures to various markets and asset classes, including hedge fund indices and some active and smart beta exposures.”

Large institutional investors have dropped multi-billion dollar allocations to hedge funds over the past 12 months, opting for potentially cheaper strategies. While this has not become a wide-spread phenomenon, it has pushed others to reconsider their positions.

ETFGI 2Other large investors have opted to move into passive instruments, but have so far largely taken these assets in-house for long-term investment.

Despite being overtaken, hedge fund assets have never been so high—while ETPs peaked at the end of May with $3 trillion—and performance has picked up in some sectors.

By the end of May, year-to-date performance by some hedge fund strategies had already beaten what they had achieved in the whole of 2014, according to EurekaHedge. However, the data monitor said inflows—to North American funds at least—were half the totals gathered a year earlier.

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