Hedge funds are increasingly using exchange traded funds, particularly to short the market or various sectors, Reuters reports.

Use of ETFs has doubled in the past year, particularly because hedge funds like their flexibility for shorting, a Greenwich Associates study on the equity derivatives market shows. Unlike shorting individual securities, which is precluded until a downward movement turns up, ETFs permit investors to short them even as they are tumbling. Among the most popular are the Spiders, which track the S&P 500, and the QQQs, which track the Nasdaq 100. Together, these two ETFs command 11% of the market, up from 4% in 2002. ETFs have also gained a great foothold in Europe, Greenwich Associates found.

Trading in equity derivatives has reached $7.4 billion this year, up 23% from 2002, and ETFs comprise a full 77% of this market.

Money managers have also greatly cut back on their use of derivatives specialists, from 60% in 2001, to just 20% in 2003.

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