If current trends continue, 2014 will herald a significant milestone for the ETF and hedge fund industries, as the total amount of capital invested in the former threatens to overtake the latter.
Hedge funds search relentlessly to deliver on a promise of alpha while their privileged investors – supplying notoriously high fees and the tactical burden of illiquidity – hope to gain advantage from partnering with the 21st century’s investment titans. Once the darlings of the asset management industry, hedge funds are seeing their pre-eminent status challenged by a diametrically opposite segment of the investment spectrum, as the cheap, liquid and transparent value proposition of ETFs continues to attract substantial investment from across the globe.
Appropriately perhaps for an infamously opaque industry, official estimates of total hedge fund assets vary wildly. So it is hard to say conclusively how much money exactly is invested over all. Taking the numbers from BarclayHedge (who provide one of the highest recent estimates and freely provide data back to 2000) it looks as if total ETF assets are on course to break above total hedge fund assets early in the New Year. Indeed, as these numbers are somewhat delayed in any case, they may have already done so.
ETF total assets as of November 2013 (Source: Blackrock); Hedge Fund total assets as of 2013 Q3 end (Source: BarclayHedge)
Of course, that is not to say that the role of hedge funds is fundamentally challenged. Indeed, in aggregate they continue to attract new investor capital. But with the search for alpha becoming ever harder, it’s only surprising that it has taken so long for ETFs to gain the larger share of the pie.