Performance of ETFs Employing Rule-based Hedging

Do exchange-traded funds (ETF) that operate like rule-based (passive) hedge funds offer attractive performance? In their December 2019 paper entitled “The Performance of Passively-Managed Hedged ETFs”, Jason Cheng, Joseph Fung and Eric Lam examine performance of passively-managed hedged ETFs (HETF) as of the end of 2017. These funds attempt to replicate a hedge fund index (either global macro or long-short equity), generally allocating about 80% to replication 20% to buffer market movements. The study looks at raw returns and alphas relative to a 3-factor (equity market, volatility, interest rate) and more complex 7-factor and 8-factor models of hedge fund returns. They test each HETF individually and equal-weighted portfolios of HETFs. Using month-end prices, net asset values (NAV), assets under management (AUM), and bid and ask quotes for 23 HETFs available at the end of 2017 and monthly hedge fund factor model inputs during January 2008 through December 2017, they find that: (more…)