Hedge Fund Investment in Exchange Traded Funds

This paper investigates the causes and consequences of hedge fund investments in exchange-traded funds (ETFs) using US data from 1998 to 2020. The findings show that transient and quasi-indexer hedge funds are significantly more likely to invest in ETFs. Moreover, hedge fund firms with a greater share of assets under management in Macro, Relative Value, and Fund of Funds strategies tend to invest more in ETFs, whereas those focused on Equity Hedge and Event-Driven strategies are less inclined to do so. ETF investments are generally associated with lower hedge fund returns, consistent with the presence of agency costs.