Hedge Funds and ETFs

Some high profile hedge funds use ETFs (Exchange Traded Funds) and ETPs (Exchange Traded Products) as part of their investment strategy.  These luminaries include Bridgewater Associates, Eton Park Capital Management, Lone Pine Capital, Millennium Management, Oak Hill Investment Management and Paulson & Co. according to their 13-F filings with the Securities and Exchange Commission (SEC) in December 2011.  Why would these managers use these efficient and low cost securities, risking the ire of their investors who are paying them "2 and 20"?  They are used to:

• Used as a temporary investment while individual securities are picked.  They allow the manager to invest quickly in the space before establish stock specific positions.
• Invest in markets or sectors where the manager does not have the infrastructure for detailed research or specific knowledge
• Arbitrage a security
• Mask their trades by using a large ETF
• Invest based on macro opinions
• Get exposure on a sector level when individual securities' correlations are high
• ETFs have liquidity which allows managers to trade out of positions easily
• Establish a position in sectors or regions with low liquidity and buying securities is hard
• Hedge a position

Depending on the fund strategy, fund of fund managers and investment consultants view ETF usage as positive for global macro and systematic trading strategies and negative for fundamental stock pickers.  Equity long/short managers are receiving the "2 and 20" to pick securities, not to be an index fund.

Top 5 ETFs Held by Hedge Funds

• SPDR Gold Shares (GLD)
• Vanguard ETF Emerging Markets
• Market Vectors ETF Gold Miners
• Vanguard Total Bond Market ETF
• Powershares QQQ

Top 5 Shorted ETFs by Hedge Funds

• SPDR S&P 500 ETF SPY Index
• iShares Russell 2000 Index Fund IWM Index
• Energy Select Sector SPDR Fund
• Financial Select Sector SPDR Fund
• SPDR S&P Midcap 400 ETF Trust

The source for this article can be accessed here.

ETFs That Replicate Hedge Fund Strategies

Murray Coleman of Barron's wrote about ETFs that gave the investor exposure to hedge fund strategies without paying to 2 and 20 fee or being a qualified institutional buyer.  The ETFs named in the article were Cambria Global Tactical ETF (GTAA), Credit Suisse Long/Short Liquid ETN (CSLS), Credit Suisse Merger Arbitrage Liquid ETN (CSMA) and WisdomTree Managed Futures (WDTI).

CSLS tracks hedge funds using long/short strategies and CSMA does the same for merger arbitrage funds.  GTAA holds about 80 ETFs in its portfolio and the fund managers change its allocations among them depending on the current investing environment.  WDTI invests in 24 futures in about 12 sectors.  It invests using the seven month moving average as an indicator of which contracts to short and go long.

The source for this post can be accessed here.

ETFs for the Emerging Markets

I subscribe to several other financial blogs.  Money magazine recommended one authored by a portfolio manager named Roger Nusbaum that I have been following recently.  His post on Friday is about Exchange Traded Funds (ETFs) sponsored by EG Shares.  ETFs are securities that represent a basket of securities.  Unlike mutual funds which are priced daily, ETFs are priced continuously.  Most ETFs are based on an index such as the Standard & Poor's 500 or NASDAQ 100.  These are called passive ETFs.  There are active ETFs that mimic the portfolio of a fund manager.  These are rare.  EG Shares has created 10 sector specific funds for the emerging markets.  The emphasis is on Brazil, Russia, India, China and South Africa.  Nusbaum finds the materials, telecom and industrial ETFs the most interesting.  Less so with the technology ETF which has 88% of holdings in China and India.  He also gives some ideas on how to pair sector specific ETFs and country funds for proper diversification of holdings.

The source for this post is here.