Hedge fund investment in ETFs

  • This paper examines the causes and consequences of hedge fund investments in exchange traded funds (ETFs) using U.S. data from 1998 to 2018. The data indicate that transient hedge funds and quasi-indexer hedge funds are substantially more likely to invest in ETFs. Unexpected hedge fund inflows cause a rise in ETF investments, and the economic significance of unexpected flow is more than twice as large for transient than quasi-indexer hedge funds. ETF investment is in general associated with lower hedge fund performance. But when ETF investment is accompanied by an increase in total flow and unexpected flow, the negative impact of ETF holdings on performance is mitigated. The data are consistent with the view that hedge fund ETF investment unrelated to unexpected flow is an agency cost of delegated portfolio management.

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Author:Douglas J. CummingORCiDGND, Pedro Monteiro
Series (Serial Number):CFS working paper series (No. 699)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2023/02/28
Tag:Active investors; Agency costs; Delegated portfolio management; ETFs; Exchange traded funds; Hedge funds
Edition:This Draft: January 31, 2023
Page Number:57
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:G Financial Economics / G2 Financial Institutions and Services / G23 Pension Funds; Other Private Financial Institutions
Licence (German):License LogoDeutsches Urheberrecht