ETFs Growing in Popularity, Surpassing Hedge Funds

November 7, 2016 James Heinsman Hedge Fund News

S&P 500 Closing Values (1950-16) along with 1, 2 and 3 Year Moving Averages. Chart courtesy of Overjive

S&P 500 Closing Values (1950-16) along with 1, 2 and 3 Year Moving Averages. Chart courtesy of Overjive

Lower fees and better performance have helped exchange-traded funds (ETFs) to become more popular, dollar for dollar, than hedge funds.

The ETF industry now has over $3.2 trillion in assets, leaving behind the hedge fund industry which manages about $2.87 trillion. Investors are switching their bets to ETFs to save on management fees, and cash in on the better performance of the ETFs compared to hedge funds.

ETFs collect only about 35 basis points, on average, in fees, compared to hedge funds, which charge a 1.5 percent fee on assets managed, and a whopping 18.9 percent, on average, on profits generated.

In the past large investors, like public pension funds and sovereign wealth funds, were happy to pay for differentiated returns as well as protection from the vagaries of the market. This helped the hedge fund industry to grow from a back-water industry in the 90s to an industry with $3 trillion in investments in 2014.

In its early days the hedge fund industry performed well, better than investors who were exposed to market benchmarks (alpha). But with growth came also increasingly poor results. In 2011 hedge funds stopped providing excess returns, and since then have not done as well as the benchmarks.

Investors are pulling their money out of hedge funds and moving it to more active indexing strategies such as ETFs.

ETFs, Hedge Funds,

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