BlackRock, Fidelity Challenge Hedge Funds With Trend-Chaser Bets

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(Bloomberg) — Trend-chasing hedge funds are facing a fresh wave of competition from the ETF world, as asset managers make their latest push to open up strategies to the masses that were once reserved for the financial elite.

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BlackRock, Invesco and Fidelity have all recently filed to launch so-called managed futures ETFs, which use derivatives to surf momentum across a variety of asset classes. By adapting to changing market conditions with their systematic models, these funds aim to act as a bulwark against pullbacks in traditional portfolios. 

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The hedge funds that follow similar strategies — known by their regulatory moniker “commodity trading advisers” or CTAs — still control some $340 billion, but their assets have stagnated over the past decade and dipped since 2022, according to BarclayHedge data.  

The ETFs that have entered the fray are still tiny in comparison, but the $3.3 billion they now manage is nearly double what it was a year ago, data compiled by Bloomberg shows. The ETFs have been helped by their lower fees, and at least in 2024, their better performance, in part thanks to their simpler investment style.  

The SG CTA Index, which tracks 20 such hedge funds, rose 2.4% in 2024. Meanwhile, the average return from similar ETFs was around 7.3% over the same period.

“As more entrants arrive, they will try to provide a lower-cost offering,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “If they can outperform the hedge funds, they will gain the assets.”

These new products represent the latest efforts to offer retail traders access to corners of the asset management industry that used to be restricted to sophisticated and wealthy investors. Most recently, an ETF that will invest partly in private debt made its controversial debut, while a slew of products mimicking private equity have flooded the market. 

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These new ETFs are cheaper than the Wall Street products they are imitating, but they are still much more expensive than the passive stock index funds that have drawn most of the money from retail investors — and generally outperformed more active strategies.  

But diversified hedging products have been attractive to some retail traders because they come with a sheen of Wall Street sophistication. Many small investors are also worried that stocks have become overvalued and that bonds may once again fail to work as a buffer, as happened during the 2022 bear market. 

In the simplest form, CTA and managed futures strategies are designed to go long and short various assets via futures contracts. From commodities to currencies, stocks and bonds, the fund managers look to identify and surf trends wherever they appear in markets. The goal is to make money regardless of the market environment but most critically when bonds and stocks are both plunging in value.

When a hedge-fund strategy is packaged as an ETF, it comes with certain trade-offs. Since they cannot limit inflows and have to be both transparent and liquid during the day, they typically opt to trade a more limited set of markets and do so more slowly than their hedge-fund counterparts, says Adi Mackic, a client portfolio manager at Man AHL, the British firm that pioneered the trend-chasing strategy in the 1980s.

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A managed futures ETF sub-advised by Man trades just 26 markets, compared with the hundreds used by Man’s CTA hedge fund. 

Other than Man, nearly all the players in the ETF space are smaller managers focused on that vehicle. Now, though, the giants are getting involved, and they have a good track record of disrupting more expensive competitors with cheap new ETFs.

BlackRock, Fidelity and Invesco all declined to comment on the planned offerings, citing the regulatory quiet period after filings.

While the ETFs will likely target a retail audience, they could eventually represent a broader challenge to CTAs and put downward pressure on their fees. Hedge funds tracked by the SG CTA Index charge an average management fee of 1.3% and another 13.9% on performance, according to Societe Generale. By contrast, the three largest ETFs with a similar investment approach have an expense ratio of roughly 0.84%, data compiled by Bloomberg show. 

Hedge funds “tend to compete with more and more complexity, which raises their costs, doesn’t improve their performance but justifies their fees and potentially gets them incremental assets,” said Andrew Beer, managing member of Dynamic Beta Investments, which runs the largest managed futures ETF. 

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Simplicity turned out to be the winning formula in 2024, with some hedge funds focused on exotic markets posting their worst year ever after a strong run over the past decade. Among some of the biggest players in this sub-genre, Man AHL Evolution and Systematica Alternative Markets Fund both lost about 6% while Florin Court Capital dropped 11%.

Mackic at Man chalks this up to market circumstance as the more exotic funds were whipsawed by choppy trends in particular markets like energy. Over the long run, more diversified CTAs should win out, he stresses. 

ETFs and performance issues, though, are not the only threat to hedge fund CTAs. Even in the institutional world, pensions and other allocators are turning to cheaper swaps products that are issued by banks to imitate systematic strategies — a business commonly known as Quantitative Investment Strategies, or QIS.

To Corey Hoffstein, chief investment officer of Newfound Research, this is all just the latest chapter in the shift of trend chasing from a hedge-fund strategy in the early 2000s to one that can now be easily traded on the cheap. His firm has launched two ETFs that combine traditional assets like stocks and bonds with CTA strategies.

“I’m sure if you were talking to someone who’s managing a hedge fund, they would say, ‘An ETF can’t do what we do. We do unique and innovative things,’” he said. “Where the ETF is coming is, it’s saying ‘that’s great, but not everyone has a million dollars to allocate.’”

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