ETF Rebalancing, Hedge Fund Trades, and Capital Market

51 Pages Posted: 13 Jan 2023 Last revised: 28 Dec 2023

See all articles by George Jiaguo Wang

George Jiaguo Wang

Lancaster University Management School; New York University - Stern School of Business

Chelsea Yaqiong Yao

Lancaster University - Lancaster University Management School; New York University (NYU) - Leonard N. Stern School of Business

Adina Yelekenova

Lancaster University Management School

Date Written: October 6, 2023

Abstract

The embedded transparency and predictability of ETF rebalancing creates opportunities for anticipatory arbitrage trading by hedge funds (HFs). We document that ETF rebalancing is associated with strong price distortions of underlying securities. HFs front-run ETFs by gradually adjusting their arbitrage positions before ETF rebalancing in both equity and option markets. The front-running exaggerates the price impact of non-fundamental demand and forces ETFs to buy high and sell low. We find causal evidence which relates HF front-running to ETF rebalancing by exploiting the unique event of index rebalancing postponement in March 2020. Our findings highlight the hidden costs of ETF rebalancing.

Keywords: ETF Rebalancing, Hedge Funds, Arbitrage Trades

JEL Classification: G10, G12, G14, G23

Suggested Citation

Wang, George Jiaguo and Yao, Yaqiong and Yelekenova, Adina, ETF Rebalancing, Hedge Fund Trades, and Capital Market (October 6, 2023). Available at SSRN: https://ssrn.com/abstract=4324054 or http://dx.doi.org/10.2139/ssrn.4324054

George Jiaguo Wang (Contact Author)

Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, Lancashire LA1 4YX
United Kingdom
+44 1524 592 577 (Phone)

HOME PAGE: http://www.lancaster.ac.uk/lums/people/george-wang

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Yaqiong Yao

Lancaster University - Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom

HOME PAGE: http://www.chelseayao.com

New York University (NYU) - Leonard N. Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY NY 10012
United States

Adina Yelekenova

Lancaster University Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
938
Abstract Views
3,154
Rank
47,043
PlumX Metrics