It is no secret that select hedge fund managers carry with them an aura of glamor and star treatment society often reserves for athletes and entertainers.
So much so that some issuers of exchange traded funds have found success with offering investors ETFs that give investors access to some of the most widely held hedge fund equity positions. [A Glamorous Guru ETF]
Of course, hedge funds like ETFs as well and with just a few minutes of homework, investors can unearth which ETFs are popular with the hedge fund crowd. That does not mean investors should always mimic to a tee the ETF holdings of hedge funds.
“Hedge funds likely have their own reasons for holding certain ETFs when similar ones are cheaper. They need to know they can trade big stakes and still get good prices, so they want ETFs with lots of trading. Another reason is that they’ve owned a certain ETF for a long time and are comfortable with it,” reports Eric Balchunas for Bloomberg.
A good example of a hedge fund paying up for a pricier ETF when a comparable, lower-cost alternative is available is Ray Dalio’s Bridgewater Associates, one of the largest hedge funds in the world. As Balchunas notes, Bridgewater owns $3.3 billion worth of the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
EEM, the second-largest emerging markets ETF by assets, charges 0.67% per year, meaning Bridgewater could save its clients $15 million per year in expenses by converting over to the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). IEMG charges just 0.18% per year and with $5.2 billion in assets under management, it is clear IEMG does not lack for fans among institutional investors. [Core ETFs Gain Institutional Fans]
Hedge funds and other professional traders that enter an ETF for size may be apt to overlook an ETF’s fees in favor of what they perceive to be a liquidity advantage, such as the one EEM possesses over IEMG. The former trades an average of $2.1 billion per day compared to $54 million for the latter, according to Bloomberg.
A similar scenario is seen with gold ETFs where the SPDR Gold Shares (NYSEArca: GLD) is the preferred gold ETF among the hedge fund set even though it charges 0.4% per year, 15 basis points more than the iShares Gold Trust (NYSEArca: IAU). John Paulson’s hedge fund, Paulson & Co., was the largest holder of GLD shares at the end of the second quarter with a stake of 10.23 million shares. [Hedge Funds Stick With Gold ETFs]
Hedge funds preferring liquidity over expenses can also be seen with gold miners ETFs. For example, George Soros and David Einhorn’s Greenlight Capital own large positions in the Market Vectors Gold Miners ETF (NYSEArca: GDX).
GDX charges 0.53% per year compared to 0.39% by the iShares MSCI Global Gold Miners ETF (NYSEArca: RING). However, GDX is not only the largest gold miners ETF by assets, but with average volume of nearly 29.6 million shares, it is also one of the most heavily traded ETFs of any type. RING trades just 56,500 shares per day on average.
iShares MSCI Emerging Markets ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM, GLD and IEMG.