The gap between assets held in global exchange-traded products versus global hedge funds widened last year due to greater inflows into ETPs than to hedge funds, according to ETFGI.
At year-end 2016 there were 6,630 ETPs globally—which includes exchange-traded funds and exchange-traded notes—holding total assets of US$3.548 trillion, says ETFGI, a London-based research and consulting firm.
Citing figures from hedge fund data and analysis firm HFR, ETFGI says there was US$3.018 trillion held at 8,326 hedge funds worldwide through 2016. After accounting for asset flows into both types of investment vehicles during the year, ETFGI concludes that ETPs widened their lead over hedge funds by US$530 billion in 2016.
ETFGI says that assets in the global ETP industry first exceeded assets invested in hedge funds at the end of the second quarter in 2015, and that the lead has been widening ever since.
Cost and performance are the big reasons why. Regarding the latter, ETFGI says the performance of the HFRI Fund Weighted Composite Index was significantly lower than the return on the S&P 500 Index in each of the past six years.
Regarding the former, the low-cost structure of ETPs have endeared them to investors. That includes not only retail investors who normally couldn’t qualify for hedge funds anyway, but also wealthier investors turned off by the recent dismal returns among many hedge funds and who no longer are keen on paying the traditional 2-and-20 hedge fund fee structure (2 percent asset management fee and an additional 20 percent on any profits earned).
Further boosting the ETP cause at the expense of hedge funds is that more money managers are constructing global macro strategies for investors by employing an ever-widening array of ETPs that enable them to invest across the vast investing universe—including areas that formerly were the domain of hedge funds—to provide more comprehensive client portfolios.