New York (HedgeCo.Net) – This past week, research firm ETFGI released a report on the state of the ETF industry and projected that assets held in ETFs will exceed the assets held in the much older hedge fund industry. While both the ETF industry and the hedge fund industry have seen impressive growth rates over the last 22 years, the ETF industry has been growing at a faster pace.
In January 1993, the first exchange traded fund was launched ETF industry was born with the launch of the S&P 500 Depository Receipts, or the Spyders as they are now known. From that day forward, the ETF industry has grown considerably as investors have taken to ETFs as an easier way to invest in diversified, index-type portfolios. The costs are considerably lower than most mutual funds and the ease of moving in and out of ETFs is much easier compared to the end of day liquidity offered by mutual funds.
According to ETFGI’s report, assets in global exchange traded products stood at an estimated $2.926 trillion at the end of the first quarter. Estimates from hedge fund research firm HFR reported assets in hedge funds stood at $2.939 trillion at the end of the first quarter. With the growth rates in mind and the total assets at the end of the first quarter, ETFGI projects that assets in ETFs will exceed those in hedge funds by the end of the second quarter.
What the report doesn’t mention is that the hedge fund industry is partially responsible for the growth in ETF assets. Many hedge funds invest in ETFs as part of their strategy and why wouldn’t they? ETFs are a great way to make trades on overall markets, single sectors, or even hedge a portfolio with an inverse ETF.
Looking at the models on the HedgeCoVest platform as a proxy for the hedge fund industry, approximately 5-10% of the assets from hedge funds are invested in ETFs. While the percentage may seem low, and it may be due to a small sample size, if you look at it from amount of assets, it is a considerable sum. If there approximately $3 trillion in assets in hedge fund assets and if the 5-10% amount is a good proxy, you are talking about $150 billion to $300 billion that is invested in ETFs by hedge funds.