ETFs Supplement HF Investments

Funds of funds are using exchange-traded products to fill the gaps in their portfolios.

When they want to be invested in a certain country’s stock market or a particular sector – but don’t have a hedge fund allocation that does this –  funds of funds managers buy iShares or other ETFs that track the relevant indexes. 

Precious metal and emerging market ETFs in particular are seen as easy and low-cost ways to get a specific market exposure. Some fund of funds have been keeping money in platinum and gold ETFs, though this is typically a very small share of total assets.

Fund of funds customers have mixed feelings about money being in ETFs, given that they’re paying a fee to invest in hedge funds. But ETFs are at most 1% or 2% of a fund of funds, according to a consultant. “They just  round out the portfolio on the margin a little,” says this person. “It’s the hedge funds that are the main attraction.”

Currency ETFs are used to hedge currency risk in hedge fund investments, especially at times when there are strong trends in exchange rates.  Some fund of funds offer currency hedging as an option or have share classes in different currencies.

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