The number of hedge funds and sophisticated investors using exchange traded funds to execute their strategies in Europe rose substantially in the first quarter, industry experts have told FT Alphaville.
The trend was also seen contributing to uplifted trading volumes and liquidity in the products in the period.
Thus far, daily on-exchange ETF trading volumes in the continent have stuck stubbornly at 1 per cent of assets under management – reflecting the products’ preferred use in passive investment strategies.
But the last quarter registered a marked increase in the number of ETFs clocking up to 20 per cent of assets under management in average daily volumes, according to some ETF providers.
Easier to short
Industry experts have linked the rise to the products becoming easier to short in Europe.
Not only are more investors now putting ETFs into their lending pools, new structures have been launched that make it easier for market makers to create stock for lending on demand — a process known in the industry as “create to lend“.
This has finally made ETFs desirable to hedge funds employing long and short strategies, they say.
ETF traders confirm the trend.
“We have definitely seen an uptick in interest from hedge funds,” Manuel Schlabbers, head of European ETF trading at Credit Suisse, told FT Alphaville. “Several hedge funds still prefer to trade sector swaps the way they used to but there are certain clients who have moved much of their sector trading over to ETFs.”
He added that up to two thirds of the flow he saw represented short positioning.
Figures compiled by Data Explorers, meanwhile, showed that the number of European ETFs with lending activity – an indicator of shorting use — rose to more than 250 products in the first quarter of 2010. That compares to an average 125 products being shorted in the first quarter of 2009, as can be seen in the following chart:
The value of ETFs on loan increased to $1.43bn in April, versus a comparative figure of $476m the year before:
The above picture comes against total assets under management in Europe of some $218bn at the end of January, according to data from Blackrock, the owner of ETF provider iShares.
A shot in the arm?
Michael-John Lytle, a director at the multi-bank backed provider SourceETF — which launched a year ago with the specific aim of attracting hedge funds to its sector products — says the trend could now turn into a shot in the arm for the European industry, which celebrated its 10th year this month.
“In the US, the growth of the US ETF market hit an inflection point at 10 years,” he told FT Alphaville. “One of the factors in the sharp increase in assets in the US was a marked growth in trading turnover.”
Today, average daily volumes in the US surpass 12 per cent of assets under management on a regular basis, according to Lytle.
Blackrock figures confirm that January experienced a 15.7 per cent rise in the turnover of European exchange traded products (ETPs) to €65bn, 41 per cent higher than the level seen the year before.
The report added that the products’ share of total equity turnover in Europe rose sharply in the last two years from 3.3 per cent to 12 per cent.
As trading turnover increases, it is hoped the percentage of products traded on exchange will grow with it too. Currently, about 50 per cent of European ETFs trade takes place in the over the counter market.
Related links:
ETF anniversary under cloud of uncertainty – FT Alphaville
How ETFs fueled high frequency trading - FT Alphaville
Oh no, my ETF is turning Japanese – FT Alphaville