That said, I think there are many uses for ETFs in the alternative space. As just one example, I believe if you take a look at the 13-F filings for the Harvard endowment, 9 of their top 10 positions are in ETFs. Though the majority of the endowment’s money is in private vehicles, this still represents hundreds of millions of dollars. Looking at the specific ETFs they invest in, it seems that they use them as an efficient way to gain exposure to emerging markets. I have also seen some discussion around the rise in popularity of leveraged ETFs. The way these get rebalanced implies some interesting effects on their returns that I’m sure are exploited by hedge fund managers. One example strategy would be to simply short both sides of a bull/bear leveraged ETF pair like ERX/ERY. I would also assume that traditional pair traders like using ETFs because of their good liquidity and mean reversion characteristics (they are not likely to go bankrupt the same way that an individual stock is and news is less likely to shock an aggregation than a single stock).

Very nice post. I’d like to link back to it from my new blog. Thanks….