ETFs' AuM could overtake hedge funds, says EY study

27 Jan, 2014

Assets invested in Exchange Traded Funds (ETFs) could surpass the size of the global hedge fund industry over the next 12 to 18 months, according to a study by Ernst & Young (EY).

ETFs currently manage around $2.4 trillion, just shy of the $2.6 trillion controlled by hedge funds although EY is predicting the ETF industry will grow between 15% and 30% annually over the next five years.

Investors in Asia-Pacific display the greatest interest in ETF products globally, with EY anticipating annual growth rates of between 20% and 30% in ETF assets in the region. The US, home to 70% of ETF assets, is forecast to grow by 15% annually while Europe will average between 15% and 20%.

“The European market is comparatively sophisticated but geographically fragmented and carries a heavy regulatory burden. The rapid development of Asian ETF markets suggest that they could leapfrog ahead of Europe in the future,” said Lisa Kealy, EY’s ETF leader in Europe, the Middle East, India and Africa.

Forty-nine per-cent of respondents said retail investors will be a key driver towards ETFs’ strong growth, compared with just 20% in 2013.

Nonetheless, the ETF space is not immune to challenges. Market participants are nervous of the negative effects an ETF scandal could bring, particularly in the retail space. Many of those surveyed said regulators should devote more attention to leveraged ETFs and ETF products not covered by the European Securities and Markets Authority (ESMA) and UCITS. Despite regulatory concern about synthetic or swap-based UCITS ETFs, 75% of respondents felt there was a future for swap-based products.

Meanwhile, hedge funds are managing record Assets under Management (AuM) and the industry’s solid performance in 2013 is likely to facilitate more inflows.  A recent study by Barclays Prime Services estimated hedge funds will see approximately $80 billion of inflows in 2014 driven primarily by institutional investors such as public and private pension plans boosting their exposures to the asset class. A survey of institutional investors by BlackRock was equally bullish with 30% of respondents confirming they would increase their capital allocations to hedge funds over the course of the year.

AuM at hedge funds is also likely to grow courtesy of increased investor interest in regulated or liquid alternatives such as ’40 Act hedge funds. Despite the compliance challenges of running a ’40 Act hedge fund, not to mention the high costs, service providers are confident about the potential of liquid alternatives. Citi Prime Finance calculates $939 billion of retail assets could flow into liquid alternatives by 2017 while Barclays revealed 29% of investors planned to add liquid alternatives to their portfolios in 2014, a 6% increase from 2013.









ETFsEYBlackRockCiti Prime FinanceBarclays Prime Servicesliquid alternativesESMAUCITS