It is no secret hedge funds have been using exchange-traded funds (ETFs) to make directional bets on a broad market index or a specific industry group. They frequently buy “call” options or hedge with “put” options. Sometimes they hedge by shorting the funds outright.

This said, one of the interesting unnoticed themes to emerge from the recent wave of quarterly 13F filings, which take a snapshot of the portfolios of equity investors on the final day of the first quarter, are the number of high-profile hedge fund managers who took new put option bets to hedge their exposure.

In many cases, these are hedge funds that don’t typically have a history of investing in ETFs. This hedging strategy so far has proved to be a prudent move, given that the stock market has sagged since its strong, double-digit first-quarter surge.

According to David Beth of institutional options and ETF execution firm WallachBeth Capital, “While we continue to see increasing ETF exposure on the part of our hedge fund clients, many of whom necessarily layer option strategies to hedge directional bias, we’re also seeing noticeable upticks insofar as traditional long/short managers initiating the use of  ETF options as part of a fundamental risk management approach.

Added Beth, “While the more sophisticated focus on strategies that can profit from changes in volatility and skew over both short and longer-term horizons,  even the most elementary strategies that use puts and/or calls are certainly gaining favor with long-established and well-respected hedge funds as well as other institutional client profiles.” Continue reading →