Hedge Fund ETFs

Better than the Originals?

May 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Core hedge fund strategies are available as low-cost and transparent ETFs
  • The performance of hedge fund ETFs has been comparable to that of their benchmarks
  • ETFs have only captured 1% of hedge fund assets


As Amazon has been decimating large parts of the retail industry over the last two decades, ETFs have done the equivalent to the mutual fund industry in the financial world. Today ETFs are covering nearly all areas of the markets, no matter how small the niche. Innovative strategies range from biblically responsible to marijuana ETFs.

However, one market that is largely undisrupted by ETFs is the hedge fund industry. ETFs have been launched that offer hedge fund strategies and could be used by investors to replace expensive hedge fund allocations, but it does not appear that these have captured a meaningful portion of the $3 trillion managed by hedge funds.

In this short research note, we will analyze hedge fund ETFs available in the US and consider why they have not been commercially more successful.


The hedge fund industry has grown significantly and manages more than $3 trillion as of 2018, which is approximately the same amount as private equity funds manage. The strategies offered have become diverse over time, however, it is worth noting that the industry should be relabelled to alternative funds as many strategies like shareholder activism or event-driven provide little or no hedge against a market downturn, given a lack of short positions (read Hedge Fund Factor Exposure & Alternatives).

In this analysis, we only consider ETFs that aim to offer returns uncorrelated to markets by being able to go long as well as short stocks or other securities. The resulting universe of hedge fund ETFs can be categorized into five types:

  • Hedge fund index replicators
  • Long-short equity
  • Equity market neutral
  • Merger arbitrage
  • Managed futures

The current universe of hedge fund ETFs in the US features less than 30 products. The total expense ratio is 0.93% on average, which is significantly below hedge fund fees.