Active hedge fund managers are big backers of the passive funds stealing their flows

Key Points
  • Hedge funds held about $50 billion of ETF securities last year, up from the $12 billion the industry held a decade ago, according to Symmetric.
  • Just last week, Lee Cooperman told CNBC hedge fund investors won't become billionaires through passive indexing, but some of his younger peers apparently disagree.
  • Funds use ETFs to make directional macroeconomic bets or offset short positions because of their liquidity.
Leon Cooperman
Katie Kramer | CNBC

In the ongoing assault on active management over high fees and underperformance, famed hedge fund manager Lee Cooperman defended the industry's ability to outperform on CNBC last week.

"All I know is the ability to underperform exists, the ability to outperform also exists," he said. "Warren Buffett, Mario Gabelli, Stan Druckenmiller and Ken Langone — and a little bit of Lee Cooperman — didn't get to their net worth by buying an index."

That may not be how Cooperman made his fortune. But the prevalence of passive instruments inside hedge fund portfolios has been growing over time.

Last year, hedge funds held about $50 billion of ETF securities, which was down from $61 billion at the end of 2014, but far higher than the $12 billion worth of ETFs that the industry held a decade ago. That's according to data compiled by hedge fund research firm Symmetric. The firm found that ETF holdings represented about 1.6 percent of assets in 2006, whereas it was about twice that proportion last year.

The representative data is derived from quarterly filings, known as 13Fs that only indicate long positions and may be outdated.

Some managers, largely dependent upon the fund's strategy, have a majority of their portfolios invested in ETFs. Bridgewater Associates, for example, owns almost $10 billion worth of ETFs, which represents about 84 percent of its equity holdings, according to data compiled by FactSet.

Hedge funds utilize long positions in ETFs for a variety of reasons. One is to offset their short positions. For example, Kynikos Associates' portfolio is 83 percent ETFs, according to FactSet data, which can counterbalance the various short positions that the firm, led by James Chanos, is known for.

Other managers utilize ETFs to make directional bets on macro situations. They also hold the securities because they're quite liquid and can be easily sold in the event of redemptions (which has been a common occurrence lately).

Either way, as the debate ensues over active management and passive management, it's apparent that the active managers are helping support the passive management industry through their holdings.

Perhaps more than anyone would like to admit.