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ETFs Tied to Hedge Fund Trends

The S&P 1500 energy sector fell 24% in the fourth quarter, significantly underperforming the 1.0% decline for the broader index. Despite pressure on oil prices and reduced capital spending, the ten largest equity-focused hedge funds favored this sector, according to S&P Global Market Intelligence’s Hedge Fund Tracker research. In addition, energy equity ETFs had strong inflows, as investors bottom fished.

According Pavle Sabic, S&P Global’s Head of Market Development for Corporates and the author of the hedge-fund tracker research, energy stocks were the most popular, with $1.5 billion of net new assets.

We think hedge fund demand in the energy sector is consistent with the strong inflows to related ETFs in the fourth quarter.

The three largest energy equity ETFs gathered $1.4 billion of net new assets, with $545 million in Energy Select Sector SPDR (XLE Overweight).
 The three largest energy equity ETFs gathered $1.4 billion of net new assets, with $545 million in Energy Select Sector SPDR (XLE). One such buyer was hedge fund Swan Wealth Advisors, which increased its stake in this diversified ETF.

ETF usage by hedge funds was commonplace, according to S&P Global Market Intelligence research and analysis of 13F filings (apart from the Hedge Fund Tracker report).  For example, Bridgewater Associates increased its stakes in Vanguard FTSE Emerging Markets (VWO) and iShares MSCI Emerging Markets (EEM) by 9.7% and 14%, respectfully in the fourth quarter; the combined stakes were slashed by 40% in the third quarter.

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 While some investors may want to use this analysis to spot securities that are in and out favor by hedge fund managers, others may want the benefits and liquidity that ETFs provide. – and there are plenty of ETFs that emulate hedge fund strategy.

Just as assets for the ten largest hedge funds declined in the fourth quarter, so did the base for ETFs that track the “smart money”.  Both Global X Guru (GURU) and AlphaClone Alternative Alpha (ALFA) experienced net outflows. Valeant Pharmaceuticals, which had the third highest stake increase in the Hedge Fund Tracker, is a top-10 holding in both of these ETFs.

To learn more about these and other ETFs analyzed by S&P Global Market Intelligence, visit http://trymsatoday.com.

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