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Breaking bad: ETF returns sock it to the hedge fund industry


This week, regular columnist Allan Lane of Algo Chain looks at how ETF returns should have most hedge fund managers running scared…

The facts are just the facts, so I am pleased to report that, with some exceptions, the hedge fund industry turned in its best performance in ten years during the first six months of 2019. As a quant, the allure of developing an absolute return strategy is hard to resist. The idea of using sophisticated techniques from the realms of data science to select the winning stocks during a market rally and short the losers when the market sells off has, over the years, given birth to many a hedge fund start-up.

However, we all lead busy lives, and within the mayhem that drives our daily routines it is sometimes hard to not see the bigger picture.  So, pause for a minute and take in the fact that we are currently witnessing the most favourable investment landscape for many a generation.
Applying the Queensbury rules, let’s start with the facts and list some of the best Year-To-Date performance numbers of ETFs listed on the London Stock Exchange.

ETF NameReturn  
WisdomTree Artificial Intelligence UCITS ETF 39.2  
L&G Gold Mining UCITS ETF 37.1  
Xtrackers MSCI USA Information Technology UCITS ETF 37.4  
Invesco CSOP FTSE China A50 UCITS ETF 34.9  
iShares Global Clean Energy UCITS ETF USD 33.8  
HSBC MSCI Russia Capped UCITS ETF 33.4  
The First Trust US IPO Index UCITS ETF 32.3  
Han ETF Cloud Technology UCITS ETF 30.0  
Xtrackers S&P Select Frontier UCITS ETF 28.8  
Xtrackers MSCI USA Consumer Discretionary UCITS ETF 28.7  

Year-To-Date Performance %

(As of 23rd July 2019)


Talking about the best performing funds is always an exercise in data mining, and the astute observers among you will notice that not a single one of these ETFs are currently in any of our Algo-Chain model portfolios. There are, however, many other ETFs that ‘only’ returned 10 per cent to 15 per cent year to date (yes, say that slowly for good effect). It is against this backdrop that hedge fund performance will be incorrectly judged.

To this we should not forget that the veil has been lifted and there is no going back. While hedge funds have been repairing their reputation, Neil Woodford has decimated the misplaced trust often associated with ‘star’ fund managers. Judging by the negative press in the UK’s national newspapers, many other well-known corners of the financial services industry are themselves under the microscope.  It’s as if out of nowhere, ‘transparency’ is all the rage.
Passive investing, active stock selection and absolute return strategies all have their merits, but like it or not it is the knock-on effect of transparency that will move the goalpost for many.  As this long-established rally turns to dust, as it surely will, then it will be interesting to see how well the 10-year performance numbers stack up across the different investment philosophies.  

Either way, if I were a hedge fund manager, I would be running scared in a market like the one we are experiencing now where the Top 50 best performing ETFs on the London Stock Exchange are up at least 25 per cent on a Year-To-Date basis, socking it to the hedge fund industry. Here is an opportunity for hedge funds to get it right when the tide finally turns.

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