Early evidence on the performance of hedged exchange traded funds

This study provides early evidence on the performance of Hedged Exchange Traded Funds (HETFs), which were introduced around 2006. These securities track and enable retail investors to access two hedge fund strategies: global macro and long/short equity. Using monthly data of HETFs that survived until December 2017, the paper shows that most of the individual HETFs and HETF portfolios have significant tracking error risk; despite the survivorship bias, the sample of HETFs fails to produce positive average returns and underperforms both 1-month T-bill and S&P500. Moreover, their alphas adjusting for multiple risk factors related to hedge fund returns were negative. We further find that adding individual HETFs and HETF portfolios could not improve the Shape ratios of traditional stocks and/or bonds portfolios, suggesting that HETFs themselves have high market and interest rate exposures.