Hedge funds are exploiting the shortcomings of Wall Street's trendiest investing style

When the value of some exchange-traded funds fell more than the indices they were tracking in August, a group of hedge funders saw an affirmation — that ETFs are vulnerable.

“It’s almost like ‘I told you so’,” hedge-fund manager Ian McDonald told the Wall Street Journal’s Rob Copeland and Bradley Hope. “This is what I’ve been waiting for.”

ETFs are made up of baskets of securities and are seen as a cheap means of gaining broad exposure to markets. The US ETF industry had nearly $US2 trillion in assets under management at the end of 2014.

These funds proved difficult to price in August, when markets went haywire.

Some hedge funds are now betting that some ETF price swings “are more pronounced than the moves of their underlying assets,” according to The Wall Street Journal.

Steven Cohen of Point72 has been betting against commodities ETFs like the United States Oil Fund, which tracks the price crude oil. McDonald’s hedge fund, Hilltop Park, is shorting the constituents of the $US1.2 billion PureFunds ISE Cyber Security ETF. He is betting that outflows from the ETF could push the stocks down.

Read the full article at The Wall Street Journal.

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