Over a decade ago, when Canadian Investment Review launched its first-ever Investment Innovation Conference focused on alternative investments, alpha was the main event. Nearly all the speakers at the conference were talking about tools and strategies to help plan sponsors find and use alpha in their portfolios. And hedge funds were a big part of the agenda.
Fast-forward to the end of 2013 and this story emerged—exchange-traded funds (ETFs) are now poised to overtake hedge funds on the investment front. According to Tim Edwards, director of Index Investment Strategy at S&P Dow Jones Indices, ETFs are edging up toward US$2.5 trillion in total amount of capital invested, bringing them in line with the total amount invested in hedge funds. (Edwards is taking the numbers from BarclayHedge’s highest recent estimates.)
Of course, the data likely doesn’t capture all of the money invested in the hedge fund space, but it does highlight a notable and growing trend as more and more investors hop off the alpha bandwagon in favour of lower cost and liquid investments.
“Once the darlings of the asset management industry, hedge funds are seeing their pre-eminent status challenged by a diametrically opposite segment of the investment spectrum, as the cheap, liquid and transparent value proposition of ETFs continues to attract substantial investment from across the globe,” Edwards said.
This doesn’t mean that hedge fund assets are on the wane—in fact, they are still trending upwards. But the growing use of ETFs in the asset management space does show that investors are increasingly putting beta in front of alpha and that cost and liquidity will likely remain top priorities—at least for the near future.