More client-hungry hedge fund managers are looking to put their investment strategies to work in exchange-traded funds, a move that could exponentially expand their pool of investors but requires them to slash investment management fees.

That is a tradeoff many managers of smaller hedge funds are willing to make, hoping Mom-and-Pop investors can fuel their growth. Smaller funds are often less able to attract assets from large pension funds and institutions that prefer the biggest hedge funds with billions in assets and long track records.

"It's a matter of access," said Mebane Faber, chief investment officer at California-based Cambria Investments, whose global tactical hedge fund was shuttered and reinvented as the Global Tactical ETF in October 2010.

His ETF now holds some $40 million in assets. He declined to discuss how much growth that represents over his former hedge fund, but he has found it worthwhile enough to consider converting another of his two remaining private funds.

Such moves may become more common because of changes occurring in the $2.4 trillion global ETF space. Exchange-traded funds were originally conceived of as passive index-tracking investments, but more are now actively managed and use alternative strategies like arbitrage and short selling of stocks.

ETFs can be traded like common stock, making them more accessible than actively managed mutual funds, thus easier to market for a fund manager.

The U.S. Securities and Exchange Commission is considering a rule that would allow ETF managers to disclose their holdings less frequently than the current daily requirement. Several large ETF issuers have filed proposals to prolong the disclosure period, but none have been approved yet. Such a change would make ETFs more appealing to privacy-dependent hedge managers.


Switching to an ETF may not appeal to the biggest, most well-known and highest earning hedge fund managers, who would have to cut their fees drastically. Big hedge fund managers typically charge an annual management fee of 2 percent of total assets, plus a performance fee of 20 percent of profits. ETF managers typically charge fees of less than 1 percent.

But cutting fees may make sense for some smaller hedge funds, allowing them to lure more investors and grow assets. Most hedge funds require investors to put millions of dollars into the fund, which limits the investor pool to very wealthy individuals. ETFs do not have such minimum investments, so they can attract investors who are not as wealthy.