Hedge Funds Use Emerging-Market ETFs to Add Risk

By Michael PattersonMarch 27 (Bloomberg) -- Emerging-market exchange-traded funds attracted $1.6 billion of net inflows in the week ended March 25, signaling hedge funds are using the securities to “quickly raise risk levels,” according to Bank of America Corp. The inflows into ETFs, which trade like a stock and allow investors to make bets on whether indexes will rise or fall, were the most in about three months, Michael Hartnett, Bank of America’s New York-based co-head of international investment strategy, wrote in a e-mailed note today, citing data compiled by research firm EPFR Global. Hedge funds and individual investors are typically the most active traders of ETFs, he said. The iShares MSCI Emerging Markets Index, the ETF known by its EEM ticker, jumped 21 percent this month as developing-nation stocks rallied on speculation government efforts from Washington to Shanghai aimed at unlocking credit markets and reviving economic growth will succeed. The emerging-markets ETF almost doubled gains in the SPDR Trust, which tracks the Standard & Poor’s 500 Index and is among the most actively traded ETFs. Hedge funds lost an average 19 percent last year, the industry’s worst returns since Hedge Fund Research Inc. started tracking data in 1990, as equity markets tumbled the most since the 1930s. The losses contributed to a record number of hedge- fund liquidations, with about 15 percent of the industry’s offerings disappearing, data compiled by the Chicago-based research firm show. Equities rallied worldwide this month after the U.S. Federal Reserve said it will begin buying debt to reduce borrowing costs, while the U.S. Treasury unveiled a $1 trillion plan to purchase toxic assets from banks. China said its economy will rebound as a 4 trillion yuan ($585 billion) stimulus package takes effect. The emerging-markets ETF slid 2.8 percent to $25.63 as of 1:25 p.m. in New York, bringing its decline over the past 12 months to 43 percent. The SPDR Trust, known by its SPY ticker, lost 1.4 percent to $81.93. To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.