While smaller in size relative to their institutional counterparts with global influence, hedge funds wield a considerable amount of power in the capital markets, particularly with regard to equity prices.
“Hedge funds exert far more power on equity prices than most other classes of investors, according to a recent paper, while the passive cohort are among the least influential,” a Financial Planning article noted. “Ralph Koijen at the University of Chicago, Robert Richmond at New York University and Motohiro Yogo at Princeton University used a decade of data across the U.S., U.K., euro area and Japan.”
The results of the study showed that “fast money has more than three times the impact on equity valuations, per dollar under management than long-term investors like pension funds. The insights provide ammo for stock allocators who front-run the buying and selling activity of their influential peers, in a world that can famously punish those trading on the basis of fundamentals.”
“The influence of hedge funds is remarkable given their relatively small size,” the authors wrote. Smaller investment advisors had the second-greatest impact on price, and proved even more influential across a host of other characteristics, Koijen et al found.
“Small, active investment advisors are most important for the pricing of payout policy, cash flows, and the fraction of sales sold abroad,” they said.
Investors looking to tail hedge fund activity can look at funds like the Goldman Sachs Hedge Industry VIP ETF (GVIP). GVIP seeks to provide investment results that closely correspond to the performance of the Goldman Sachs Hedge Fund VIP Index, which is designed to deliver exposure to equity securities whose performance is expected to influence the long portfolios of hedge funds.
GVIP gives investors:
- Top-notch hedge fund ideas: GVIP seeks to track the GS Hedge Fund VIP Index, which is constructed in accordance with a rules-based methodology derived from concepts previously developed by Goldman Sachs’ Global Investment Research division. The Index consists of fundamentally driven hedge fund managers’ “Very-Important-Positions,” which appear most frequently among their top 10 long equity holdings.
- Dynamic market ideas in today’s landscape: GVIP offers investors a way to follow hedge fund managers’ most important long equity ideas and gain exposure to dynamic market themes. The Index constructs a focused, US-listed stock portfolio of approximately 50 holdings that can complement a core equity portfolio.
- Market resources and data from Goldman Sachs: GVIP capitalizes on the extensive resources of a leading global investment firm and pioneer in the analysis of investing trends in the hedge fund universe to offer investors access to an advanced investment solution through a low-cost ETF.
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