Here's why ETFs are overtaking hedge funds

Passive vs. active funds: Where is your money best?

The active versus passive debate just got a new wrinkle, and one analyst thinks he knows why.

Exchange-traded funds, which are the primary vehicle for passive management, now have assets under management greater than hedge funds, according to a count from research firm ETFGI. ETFs primarily follow market indexes, while hedge funds use a mix of strategies to beat those same benchmarks.

Tim Edwards, senior director of index investment strategy at S&P Dow Jones Indices, set up an experiment that put a blend of low-cost ETFs against their more expensive hedge fund brethren.

What he found essentially was that his effort to mimic hedge fund strategy using indexes—half focused on international stocks, the other half on bonds—easily beat out a popular gauge of hedge industry overall performance, the HFRI Fund Weighted Composite Index. However, the results changed when he factored in the fees.