The Performance of Passively-Managed Hedged ETFs

Abstract

This study provides early evidence on the performance of passively-managed hedged exchange-traded funds (HETFs) introduced rather recently in late 2006. The data covers surviving HETFs in 2017 under global macro and long-short classifications. Using Fung and Hsieh’s (2004) 7-factor model and Edelman, Fung and Hsieh’s (2012) revised 8-factor framework, the study finds significant negative alphas for the HETFs despite the survivorship bias. The study extends the literature on mutual fund performance and provides incremental evidence on the differential performance between global macro and long-short HETFs. The poor performance of the HETFs overall can be attributed to their high expense ratio and tracking error.

Keywords: Expense Ratio; Fund Performance; Hedged Exchange-traded Funds; Tracking Error

JEL Classification: G12; G14; G23