Practical Applications of The (Under) Performance of Hedge Fund ETFs

Practical Applications

In The (Under) Performance of Hedge Fund ETFs, published in the Spring 2020 issue of The Journal of Alternative Investments, Charles Favreau of Duquesne University, Hayden Kane of the Federal Reserve Bank of Richmond, and Austin Shelton of California State University San Bernardino perform the first rigorous examination of hedge fund ETFs (HETFs) and factors that impact their performance.

After dividing their sample of HETFs into 10 strategy categories, the authors found that each category underperforms its respective benchmark. By regressing HETF returns on sets of common risk factors, they find that all individual strategy groups of HETFs have a negative alpha. However, despite the poor performance of HETFs as a whole, some fund characteristics can indicate a good chance that funds possessing them will outperform other HETFs.

HETFs, which offer more liquidity than hedge funds and access to potentially hedge fund–like returns, are increasingly popular, with assets under management growing at 157% annually. The results of this study are essential for both institutional and retail investors to make informed decisions about investing in this space.

TOPICS: Real assets/alternative investments/private equity, indexing exchange-traded, performance measurement