Hedge Fund Investment in Exchange Traded Funds

ABSTRACT 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.