Rock-star hedge fund managers who generate robust returns are also tight-lipped about their usage of low-cost, passive index-based exchange traded products.

“Investors in hedge funds are paying big fees for active management equity selection. If a long/short manager goes long individual equities and only shorts ETFs and (indexes), it is a terrible deal for investors (because) fees should be a lot lower,” Jim Vos, CEO, head of research and principal at hedge fund consultant Aksia LLC, said, reports Christine Williamson for Pensions & Investments.

Hedge fund managers are the third-largest institutional investor of ETPs, including well-known managers like Bridgewater Associates LP, Eton Park Capital Management LP, Lone Pine Capital LLC, Millennium Management LLC, Oak Hill Investment Management LP and Paulson & Co. Inc.

“Hedge fund managers who don’t use ETFs say they don’t because they are paid to pick securities,” Daniel Gamba, managing director and head of the America iShares institutional business at BlackRock, said in the article. “Others that do use them have trouble telling clients they use ETFs, but on the other hand, have no trouble telling them about the complicated futures, options and other derivatives they also use as investment tools.”

According to Goldman Sachs researchers, around 17% of hedge fund short positions and 4% of long positions were in ETFs.

Kevin Quigg, global head of SPDR ETF strategy and consulting at State Street Global Advisors, points out that hedge funds use ETFs as a traditional hedge, as a placeholder while individual securities are selected, if the manager lacks infrastructure or specific knowledge of the market or sector, or to arbitrage an individual security.

Additionally, Mark Bamber, managing director and head of Deutsche Bank’s Delta One trading unit, notes ETFs allow hedge funds to “mask their trades” or to preserve their anonymity while investing.

Hedge funds also use ETFs to “express their technical macro views,” Bamber added. When “correlations between individual securities are high or volatility is spiking, hedge fund managers tend to use ETFs to take broad-brush exposures on sectors.”

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

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