Would a Hedge Fund ETF be Possible?

First post and currently a student so apologies if this is a dumb question.

Out of curiosity, I was wondering if anyone in this forum thinks that there could one day be an ETF-like vehicle that could give retail investors access to a single L/S HF that exclusively trades in public markets, and what structure such a vehicle may have?

Hypothetically if one were to be built, I think that an efficient and low-risk method would be to have an initial capital raise open to institutional investors before making the fund available to the public on an exchange, similar to how SPACs raise capital. All of the capital from the initial raise would be allocated to the HF to trade with, and the vehicle would be closed-end and structured so that shares could not be redeemed. Thus, the HF would not need to worry about redemptions as investors who want to divest away from the HF can only recover their capital by selling their shares on an exchange. In effect, the "ETF" would basically be a completely separate entity from the HF after creation, with the only flow of capital between the two entities being management/performance fees.

Instead of doing an initial capital raise you could also just have a large AM like BlackRock put up all of the capital for the "ETF" before listing it/selling shares and collecting small additional management fees on top of the HF's fees.

The biggest drawback for the existence of such a fund that I can think of would be a HF needing to constantly disclose all of its positions and trades so the "ETF" could trade at an appropriate price. Thus, I'd imagine such a vehicle would only exist for startup funds/funds struggling to raise capital, unless anyone has any solutions to negate this issue.

Otherwise, I feel like such a vehicle would be pretty beneficial, as it would give retail investors access to more alternative investments (I don't know many market-neutral investment products available to individuals) thus democratizing financial markets further, would help small funds raise capital without needing to pitch to/find more LPs, would give funds access to what is basically a permanent source of capital that won't be redeemed, plus more fees for asset managers and ECM bankers which I'm sure would make the members of this website happy.

Obviously I'm in no position to make something like this possible but I thought it was an interesting thought experiment and was wondering if anyone had any thoughts or suggestions?


Edit: (I'm aware that liquid alts exist but these always seemed like a bad deal for most funds due to the risk of mass redemptions by individuals being able to effectively kill a fund, figured that the closed-end vehicle described above would be a good hybrid between liquid alts and the traditional LP model of HFs)


Good point! Don't have a ton of experience in non-equity markets so this may be a dumb statement, but I would assume the same market forces that keep closed-ended mutual funds trading around NAV would work for this product as well? If the HF was restricted to only being L/S public equities with its public holdings regularly updated, I would assume that there would be an arbitrage opportunity where an investor could buy/sell a share of the "ETF" while taking (and continue to trade) the inverse positions of the HFs holdings? That action of buying/selling the "ETF's" shares depending on where it's trading relative to NAV should hopefully close the gap between the price and NAV? Please correct me if I'm wrong but I feel like traders using an easily automated arbitrage strategy like described above could add enough liquidity to keep the price relatively accurate and prevent the formation of a Spain Fund Pt.2, but again I'm not too experienced with this aspect of finance so happy to be corrected!

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Depends on how long you'd be expected to hold the replicating L/S and trading behind it every time they update their shares. The Grayscale crypto trusts are similar in that they don't allow redemptions, and some big names completely blew up trying to arb against NAV to the point where it traded at a 55% discount. Also if redemptions aren't allowed and the fund sucks, they still get to collect management fees and there's not much of an incentive for good performance if all the capital is already locked up in their ecosystem.


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