Be Your Own Hedge Fund Legend With ETFs

The third-quarter 13F filing season confirmed at least one thing about exchange-traded funds: Hedge funds are increasing their use of ETFs.

In fact, it can be said that hedge funds are big reason why earlier this year, ETFs eclipsed hedged funds in terms of total assets under management.

As recent 13F filings reveal, plenty of hedge funds do sell their ETF holdings. For example, Ray Dalio's Bridgewater Associates trimmed its stakes in the Vanguard Emerging Markets Stock Index Fd VWO and the iShares MSCI Emerging Markets Indx (ETF) EEM, the two largest emerging markets ETFs, during the third quarter. Other hedge funds did the same.

Hedge Funds' Focus

As S&P Capital IQ highlighted in a note out Thursday, hedge funds were voracious buyers of consumer staples stocks during the third quarter, which likely helped bolster the fortunes of the Consumer Staples Select Sect. SPDR (ETF) XLP. XLP, the largest consumer staples ETF by assets, is up 3.6 percent year-to-date. That is good for the fourth-best showing among the nine legacy sector SPDR ETFs, and impressive when considering staples are viewed as sensitive to changes in interest rates.

Ahead of a possible interest rate hike by the Federal Reserve before the end of this year, some hedge funds also stepped into the Select Sector Financial Slct Str SPDR Fd XLF in the third quarter. There are also ETFs that bring hedge fund-esque strategies to everyday investors, including the Global X Guru Index ETF (Global X Funds GURU) and the IQ Hedge MultiIQ Hedge Multi-Strategy Tracker ETF QAI.

A Closer Look: GURU And QAI

GURU “is one of the various ways individuals can invest in stocks held by hedge funds,” said S&P Capital in the note.

“The ETF is comprised of the top U.S. listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and concentrated holdings. From a sector perspective, consumer discretionary and financials were the largest, while technology was underweighted relative to the S&P 500 index due we think in part to recent hedge fund selling activity,” S&P Capital IQ shared.

In September, GURU was awarded the prestigious five-star rating from Morningstar for the large blend category.

The IQ Hedge Multi-Strategy Tracker ETF, which has over a $1 billion in assets, making it one of the largest hedge fund strategy ETFs, is an ETF of ETFs. That means essentially all QAI's holdings, both long and short positions, are other ETFs from asset classes including bonds, real estate and stocks.

QAI seeks to replicate the return profiles of different hedge fund strategies such as merger arbitrage, event driven, equity long/short and market neutral. QAI, which holds other ETFs and not individual stocks, is rebalanced monthly. The largest such ETF is IQ Hedge Alternative (QAI), which has $1 billion in assets. QAI has a 0.91 percent expense ratio and was down only 1.6 percent year to date,” said S&P Capital IQ.