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Hedge Fund Strategies Are Getting ETF-ed: Are Lower Fees Inevitable?

Author: Surbhi Jain | November 10, 2023 04:29pm

As institutional money increasingly flows into ETFs, market watcjers are beginning to question whether the high fees charged by hedge fund managers are still justifiable.

A tweet by Corey Hoffstein highlighted that the Simplify Market Neutral Equity Long Short ETF (NYSE:EQLS) (expense ratio = 1%) recently bagged $104 million from General Electric’s pension fund. Earlier, Michigan’s pension fund had also put in $364 million in another of Simplify’s ETFs.

Given the state of the mortgage market, Simplify has recently launched its Simplify MBS ETF (NYSE:MTBA) investing in mortgage-backed securities (MBS), as reported by Bloomberg. The fund seeks to provide attractive yields versus comparable U.S. Treasuries while carrying little to no credit risk.

Related: Simplify Launches the MTBA ETF, Revolutionizing Exposure to Mortgage-Backed Securities

Simplify’s website states that their ETF strategies are designed to “efficiently hedge portfolios against rising interest rates, generate risk-managed income, gain exposure to alternatives.” Through their institutional-grade alternative investment strategies, Simplify is offering investors a low-cost and transparent investment vehicle, as compared to investing in hedge funds.

Another ETF that mimics a hedge fund, the iMGP DBi Managed Futures Strategy ETF (NYSE:DBMF) (ER= 0.85%) “seeks to replicate the pre-fee performance of leading managed futures hedge funds and outperform through fee/expense disintermediation.” The ETF is part of the iMGP Funds portfolio.

DBMF began in 2022 with just $60 million in assets, but now boasts more than $834 billion in assets under management. Along the same lines, the First Trust Managed Futures Strategy ETF (NYSE:FMF) (ER = 0.95%) with $162 million in assets, and the Simplify Managed Futures Strategy ETF (NYSE:CTA) (ER = 0.78%) with $159 million AUM are all attracting institutional money now.

The KFA Mount Lucas Managed Futures Index Strategy ETF (NYSE:KMLM) (ER = 0.90%) is another hedge fund strategy mimicking investment vehicle which has been quick to garner $295 million in AUM. The WisdomTree Managed Futures Strategy Fund (NYSE:WTMF) (ER=0.65%) is yet another example.

A key reason for the influx of institutional funds into these ETFs is hedge fund fees. Hedge funds typically charge 2% of the fund’s net asset value as a management fee, along with a performance fee of 20% of the fund’s profit. Given that strategy-mimicking ETFs charge less than 1% in fees, it’s conceivable that investor sentiment might drive these fees even lower.

Read Next: SEC Mandates Hedge Funds To Disclose Short Positions Following GameStop Frenzy

Photo: Shutterstock




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