Hedge Funds Prefer ETFs For Shorting: Goldman Sachs

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Even hedge funds like ETFs.

But not for the same reasons as you and me. The latest “Hedge Fund Trend Monitor” study from Amanda Sneider, David J. Kostin, Stuart Kaiser, Ben Snider, Rima Reddy and Aaron Woodside of Goldman Sachs Portfolio Research says hedge funds use ETFs primarily for just that – hedging.

Hedge funds using ETFs as hedging tool

“Hedge funds use ETFs more as a hedging tool than as a directional investment vehicle, based on our analysis of 13-F and short interest filings. We estimate that hedge funds hold $138 billion in gross exposure to ETFs compared with $1.7 trillion of gross exposure to single-stocks. ETFs represent 3% of long holdings, down from nearly 6% in 1Q 2009 but a rebound from recent quarters,” say the Goldman Sachs analysts.

In the third quarter this year Christopher Hansen-headed Valiant Capital Management hedged its losing long bets on emerging markets by allocating over 12% of its $1.65B equity holdings to buying puts on the iShares ETF that tracks emerging markets, according to this article in Institutional Investor’s Alpha. Barry Rosenstein’s Jana Partners had 25% of its assets, as at end-Q3, invested in puts on an ETF indexing the S&P 500 (INDEXSP:.INX).

It therefore appears that hedge funds are using ETFs for innovative and varied hedging strategies to protect returns from both their long and short positions in the market. The table below from the Hedge Fund Trend Monitor report by Goldman Sachs Group Inc (NYSE:GS) breaks down ETF ownership by hedge funds:

Hedge funds ETF ownership

It is clear that the lion’s share (75%) of ETF ownership by hedge fund of $138B is accounted for by short positions of $103B.

Sector-wise, the ETFs that hedge funds tend to short are shown in the following table.

2-sector-wise-shorts hedge funds

Favorite short ETFs are index funds, commodities, bonds and emerging markets. Energy, real estate and 20 year treasuries are also popular shorts.

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