It’s no secret that more and more hedge funds are aggressively using exchange traded funds, and not just to hedge. Many of them are using these index-like investments to make single-sector — or single-market — bets. For example, at the end of the first quarter, Traxis Partners, headed up by former Morgan Stanley strategist Barton Biggs, held a dozen ETFs, and six of them were his largest holdings, including funds that specialize in health care and Brazil.
But as more and more hedge funds use ETFs to make bets on the broad market or on a specific sector, they risk ....