Hedge Funds versus Hedge Fund Replication ETFs

Clones or cousins?

November 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Hedge fund replication ETFs have reasonably well replicated hedge fund index returns
  • The CTA index replication is likely the most successful, merger arbitrage the worst
  • However, it is questionable if these hedge fund indices are worth replicating


Imitation is the sincerest form of flattery, but imitating is easier in some cases than others. There have been multiple startups that tried to copy LinkedIn’s success by launching similar business-oriented social networks, but almost all failed. In contrast, there are dozens of mutual funds and ETFs that provide the same access to the S&P 500.

The barriers to entry in the asset management industry are not particularly high, which explains why there are thousands of investment products competing for the attention and assets of investors. Innovative products are copied quickly and offered at lower fees, which makes it difficult to capture and maintain high market shares.

However, not all strategies can be copied easily. U.S.-focused private equity funds provide the same exposure to the U.S. economy as the S&P 500, but smoothened valuations of private assets are difficult to replicate in public markets, where mark-to-market accounting standards prevail (read Private Equity: Fooling Some People All the Time?).

There have been various attempts to replicate hedge funds given their high fees and offer these as ETFs to even retail investors. In this research note, we will evaluate hedge fund replication ETFs.


There are two ETFs that provide exposure to the broader hedge fund indices, namely the ProShares Hedge Replication ETF (HDG) and iMGP DBi Hedge Strategy ETF (DBEH). The former manages $32 million of assets and charges 0.95% per annum, compared to $33m and 0.85% per annum for the latter. Although these fees are high compared to plain-vanilla ETFs, they are low when contrasted to traditional hedge funds that typically charge more than 1.5% plus a performance fee.

HDG aims to replicate the Merrill Lynch Fact