With Congress heavily scrutinizing the hedge fund industry, changes will need to be made and exchange traded funds (ETFs) may be the answer.

Hedge funds have been the kings of the asset management world and are known to offer investors advantages such as higher rates of return by utilizing advanced strategies through leveraging investments, long, short and derivative strategies. 

Some disadvantages of hedge funds are lockup periods, liquidity, transparency, leverage, risk management and fees, states Carl Delfeld of Chartwell ETF.  To alleviate these problems, Delfeld proposes a new fund focused on deeply discounted Asian and emerging markets with a new model utilizing country ETFs, closed-end funds, limiting the use of inverse ETFs and leveraged ETFs, and diversification.

The use of ETFs by hedge funds is nothing new.  They are a great tool for active investors, offering tight market tracking, high transparency, ease of use, broad coverage, low fees and efficiency.  ETFs enable hedge funds to gain exposure to major markets, such as the S&P 500, diversify, neutralize risk, and are often used in place of futures since they can be bought and sold at smaller sizes, which does not leave huge capital calls on the margin.

In fact, the use of inverse ETFs in the industry has been on the rise because they allow hedge funds to hold a short position without making a margin call.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.