ETF industry growth outstripping hedge funds, finds ETFGI

Mar 9th, 2017 | By | Category: ETF and Index News

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The global ETF/ETP industry grew faster than the global hedge fund industry in 2016, according to research by London-based ETF industry consultant, ETFGI.

ETF industry growth outstripping hedge funds, finds ETFGI

As of the end of 2016 there was $3.548 trillion in assets under management in the global ETF industry compared to $3.018tn in the global hedge fund industry.

During 2016, ETFs/ETPs listed globally gathered a record $389.4 billion of net inflows, surpassing the prior record of $372.3bn gathered in 2015. As of the end of December 2016 ETFs/ETPs had notched up 35 consecutive months of net inflows. In contrast, during 2016, hedge fund investors redeemed $70.1bn, the largest annual outflow since 2009, when $131.0bn was withdrawn.

Assets invested in the global ETF/ETP industry surpassed the assets invested in the hedge fund industry at the end of Q2 2015. The below graph illustrates how the assets in the ETF/ETP industry have been gaining on the assets invested in the hedge fund industry, more notably since the financial crisis in 2008.

ETFGI ETF Assets Hedge Funds

Source: ETFGI.

According to ETFGI’s analysis there was a record level of $3.548 trillion invested across 6,630 ETFs/ETPs listed globally at the end of 2016, while assets in the global hedge fund industry, according to a new report published by Hedge Fund Research (HFR), were $530bn smaller at $3.018tn across 8,326 hedge funds.

This is a significant achievement for the global ETF/ETP industry, which will celebrate its 27th anniversary in March while the hedge fund industry is 68 years old.

The growing preference for ETFs over hedge funds may be attributed to several benefits of the vehicle including smaller minimum investment sizes, greater liquidity, and lower costs. Indeed, according to ETFGI research the asset-weighted average annual cost for ETFs/ETPs is 31 basis points, or less than one third of a percent, while fees charged by the majority of hedge funds are 2% of assets and 20% of profits.

Many investors have also become disappointed with the inability of hedge funds to outperform broad market benchmarks. In 2016 the performance of the HFRI Fund Weighted Composite Index (a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database) was 5.5%, which is significantly lower than the 11.9% return of the S&P 500 Index during 2016, according to S&P Dow Jones. In each of the past six years the performance of the HFRI Fund Weighted Composite Index was significantly lower than the return of the S&P 500 Index, as shown below.

ETFGI Graph 2

Source: ETFGI.

With the positive performance of equity markets many investors have been happy with index returns and fees. This situation has benefited ETFs/ETPs, which offer an enormous toolbox of index exposures to various markets and asset classes, including hedge fund indices and smart beta exposures.

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