Are Hedge Fund ETFs Worth The Trouble?
Another hedge fund ETF debuted today and with it may come valid questions regarding just how beneficial ETFs that replicate hedge fund strategies are to investors.
The hedge funds tracked by Hedge Fund Research are up just 2.3 percent this year. Over the last five years the Hedge Fund Research Index has an annualized return of negative 0.6 percent, about in-line with the S&P, according to Breakout on Yahoo Finance.
Translation: Owning the SPDR S&P 500 (NYSE: SPY) this year would have proven to be a better bet than the average hedge fund and owning SPY over the past five years would have at least been cheaper. Those factors beg the question: Are hedge funds ETFs, often home to high fees and complex strategies, really worth the hassle for investors?
To be fair, each hedge fund ETF needs to be considered on its own merits. Here are some that may help clear up the mystery surrounding these esoteric exchange-traded products:
IndexIQ Hedge Multi-Strategy Tracker ETF (NYSE: QAI) QAI tracks an index that attempts to replicate the risk-adjusted return characteristics of hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets, according to IndexIQ.
At its core, QAI is an ETF fund of funds because most of its holdings are other ETFs. That lineup includes familiar names such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE: LQD), the Vanguard Total Bond Market ETF (NYSE: BND) and the iShares MSCI EAFE Index Fund (NYSE: EFA).
QAI debuted not long after the market bottom of March 2009 and has returned nearly 12 percent since then. The rub is SPY has surged 72 percent since QAI's debut and QAI charges 1.06 percent per year. Still, QAI has been one of the better-performing and easier-to-understand hedge fund ETFs.
IndexIQ Hedge Macro Tracker ETF (NYSE: MCRO) The IndexIQ Hedge Macro Tracker ETF tracks an index that attempts to replicate the risk-adjusted return characteristics of a combination of hedge funds pursuing a macro strategy and hedge funds pursuing an emerging markets strategy, according to IndexIQ.
Like QAI, most of MCRO's holdings are other ETFs, including LQD and the iShares Silver Trust. Oddly enough, MCRO holds both the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) and the Vanguard MSCI Emerging Markets ETF (NYSE: VWO).
Not to take anything away from MCRO, which has jumped 10 percent since its June 2009 debut, but VWO has surged 25.5 percent over the same time. MCRO is also pricey at almost 1.1 percent per year.
AlphaClone Altertnative Alpha ETF (NYSE: ALFA) The AlphaClone Altertnative Alpha ETF is new (it debuted in June) and not all that complex. Passively managed, ALFA's index ranks hedge funds and institutional investors based on the efficacy of replicating their publicity disclosed positions, according to AlphaClone. ALFA's top-10 holdings currently include Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), PepsiCo (NYSE: PEP) and Intel (NASDAQ: INTC).
ALFA is not cheap at 0.95 percent per year, but AlphaClone makes a compelling case for its index methodology. That is to say, ALFA could actually outperform SPY going forward.
iShares Diversified Alternatives Trust (NYSE: ALT) iShares comes right out and says on its web site that ALT "is not a standard ETF." ALT is structured as a trust and is not an investment company registered under the Investment Company Act of 1940. ALT's objective is provide exposure to asset classes with low correlations to traditional fare. That really means futures contracts.
ETFs heavy on futures are usually pricey and often disappoint in terms of performance. That is the case with ALT, which charges 0.95 percent per year and has lost one percent since its 2009 debut.
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