As hedge funds have seen tougher times, other modes of investment that are seen as safer have benefited. Now, in a historic shift of position, exchange-traded funds (ETFs) have outstripped hedge funds in total assets, reaching to $3.2 trillion in assets as compared with $2.97 trillion currently held in hedge funds, according to a report by the Financial Times. Analysts see the change as representative of a large-scale shift in investor interests both due to the struggles of the hedge fund industry and also to capitalize on an ongoing market rally through low-cost investments.
Major Migration to ETFs
Investors across the country have grown increasingly skeptical regarding the usefulness of hedge fund investments, as hedge funds have seen declines in returns for months and significant fees still exist. Many investors are withdrawing assets from hedge funds, only to turn around and place them in safer (and cheaper) options like ETFs.
ETF fees are much lower, in general, than hedge fund fees, with an average fee of about 35 basis points. They are also taxed differently from hedge fund assets, allowing investors to bypass capital gains concerns. Hedge funds, on the other hand, have tended to stick by the "2-and-20" fee model in spite of declining profits, although some funds are now considering changes in order to entice investors back in.
While Returns Were Good, Hedge Funds Reigned
Hedge funds were able to provide stellar returns for many years leading up to the 2008 financial crisis, and investors of all types found that they could capitalize if they met stringent requirements of minimum investments and were willing to pay hefty fees. In spite of itself, though, the hedge fund industry continued to grow, up to a point in which many analysts felt it was no longer possible for individual funds on the whole to continue to generate such impressive returns. In the wake of declining returns since about 2011, many pension funds and other investors have pulled huge amounts of assets from hedge funds. (For more, see: 2016 Investor Hedge Fund Withdrawals Reach $60 Billion.)
Could it be that ETFs are looking more appealing than they otherwise might given current market climates? Many analysts seem to think so, suggesting that ETFs and other passive strategies are more popular during the current bull market and may not provide equal enticement in a period of correction. Regardless, the rise of ETF investments nonetheless seems to signal a major shift in the way that investors are placing their money, and also in how they expect their modes of investment to serve them. Hedge funds may have found that if they are unable to sustain their reputations for stellar returns, the fees will no longer be something that investors everywhere are willing to look past.