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Three hedge fund associations are jointly suing the Securities and Exchange Commission. 

SEC&#39;s New Short-Selling Rules Face Court Challenge, Accusations They &#39;Harm Market Participants And Investors&#39;

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Merger Arbitrage ETF Tops $1 Billion in Assets

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Three hedge fund associations are suing the Securities and Exchange Commission in a bid to overturn <a href="https://www.benzinga.com/economics/macro-economic-events/23/10/35244887/sec-adopts-rule-to-increase-transparency-into-short-selling-and-amendment-to-cat-">that they say &#8220;impair price discovery.&#8221;</a>
The National Association of Private Fund Managers (NAPFM), Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) have jointly filed a lawsuit asking the U.S. Court of Appeals for the Fifth Circuit to &#8220;invalidate&#8221; two rules recently adopted by the SEC requiring hedge funds to report details of securities loans and short selling activity.
Two new rules were approved by the SEC in October that require:
<ol>
<li>Certain fund managers to report their short sales to the SEC within 14 days of month end. The agency publishes the data on a delayed basis, keeping fund manager information confidential.</li>
<li>Financial companies that facilitate securities loans disclose information about those transactions to FINRA on a daily basis.</li>
</ol>
<h2 class="wp-block-heading">Exec: SEC Rules &#8216;Impair Market Efficiency&#8217;</h2>
The petitioners argued the rules would apply contradictory and incoherent approaches to two aspects of the same underlying transaction and run counter to the SEC&#8217;s stated mission to protect investors and maintain fair, orderly and efficient markets.
&#8220;The rules will impair market efficiency and price discovery and harm market participants and investors,&#8221; said Jack Inglis, CEO at AIMA.
He added: &#8220;The SEC should instead take into account their connected nature and apply consistent reporting and disclosure frameworks for these positions.&#8221;
Also Read: <a href="https://www.benzinga.com/markets/equities/23/11/36011485/supreme-court-vs-sec-a-potential-game-changer-for-investors-and-regulators-in-house-courts">Supreme Court Vs. SEC: A Potential Game-Changer For Investors And Regulators&#8217; In-House Courts</a>
Short selling is a common trading strategy of hedge funds and involves borrowing a certain security and selling it on in the expectation its price will fall, then buying it from the vendor at the lower price, thus pocketing the difference.
Hedge funds tend to be largely private companies, but investors can back a number of hedge fund exchange traded funds. The biggest listed in the U.S. is the IQ Hedge Multi-Strategy Tracker ETF (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/QAI#NYSE">QAI</a>), which tracks the top strategies of hedge fund managers. It has gained 8.1% in 2023.
Meanwhile, there are plenty of ETFs that track short-selling strategies. The biggest of these is the ProShares UltraPro Short QQQ (NYSE:<a class="ticker" href="https://www.benzinga.com/stock/SQQQ#NYSE">SQQQ</a>) which inversely tracks the tech-heavy NASDAQ 100 index. Given the performance of tech stocks this year, it&#8217;s safe to say the SQQQ has <a href="https://www.benzinga.com/analyst-ratings/analyst-color/23/11/36024237/short-selling-rout-92-of-etf-shorts-were-unprofitable-in-the-last-month">performed badly</a> — down 72%.
<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="750" height="650" src="https://editorial-assets.benzinga.com/wp-content/uploads/2023/12/13104955/newplot-10.png" alt="" class="wp-image-160666" srcset="https://editorial-assets.benzinga.com/wp-content/uploads/2023/12/13104955/newplot-10.png 750w,https://editorial-assets.benzinga.com/wp-content/uploads/2023/12/13104955/newplot-10-300x260.png 300w" sizes="(max-width: 750px) 100vw, 750px" /></figure>
<h2 class="wp-block-heading">Regulator Faces Further Challenges</h2>
The SEC has come under increasing scrutiny from the investment community in recent months and has been the subject of several filings in U.S. courts. 
Benzinga <a href="https://www.benzinga.com/markets/equities/23/11/36011485/supreme-court-vs-sec-a-potential-game-changer-for-investors-and-regulators-in-house-courts">reported last month</a> that the regulator was being heard in the Supreme Court in relation to the use of its own internal courts when prosecuting financial wrongdoers.
In emailed responses to media requests for comment on the new short selling rules, the SEC said it would &#8220;vigorously defend challenged rules in court.&#8221;
Now Read: <a href="https://www.benzinga.com/analyst-ratings/analyst-color/23/11/36024237/short-selling-rout-92-of-etf-shorts-were-unprofitable-in-the-last-month">Short Selling Rout: 92% Of ETF Shorts Were Unprofitable In The Last Month</a>
Photo via Shutterstock.

SEC's New Short-Selling Rules Face Court Challenge, Accusations They 'Harm Market Participants And Investors'

The IQ Merger Arbitrage ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/mna#NYSE">MNA</a>) &mdash;&nbsp;one of the first exchange traded funds to make the merger arbitrage strategy long used by professional traders accessible to a broader swath of investors &mdash; recently topped $1 billion in assets under management.
<h3>What Happened</h3>
Merger arbitrage is an event-driven strategy in which traders, also known as arbitrageurs in this case, speculate on when a deal will close or if it will be finalized at all. The strategy involves buying and selling shares of two companies involved in a proposed merger.
A typical strategy would be to short shares of the target company if the arbitrageur sees reasons why the deal could be delayed or ultimately fail.
MNA, which debuted in November 2009, makes the merger arbitrage strategy accessible to everyday investors. The fund tracks the IQ Merger Arbitrage Index, meaning MNA is a passive, index-based strategy.
<h3>Why It&#39;s Important</h3>
In the ETF space, MNA is considered an alternative fund. Alternative assets are usually embraced by investors looking for assets that&nbsp;historically&nbsp;are not highly correlated to stocks and bonds. MNA recently won the 2019 Mutual Fund and ETF Industry Award for the &ldquo;Best Alternative ETF of the Year.&rdquo;
MNA &ldquo;provides diversification benefits and low correlation to other asset classes, which may improve a portfolio&#39;s risk-return profile,&rdquo; according to the issuer.
At the end of the first quarter, MNA held 35 stocks, about two-thirds of which hailed from the <a href="http://www.nylinvestments.com/polos/FS_MNA5.pdf">technology and health care sectors</a>. Top 10 holdings in the ETF include Red Hat Inc. (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/rht#NYSE">RHT</a>), First Data Corp. (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/fdc#NYSE">FDC</a>), Celgene Corp. (NASDAQ: <a class="ticker" href="https://www.benzinga.com/stock/celg#NASDAQ">CELG</a>) and SunTrust Banks, Inc. (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/sti#NYSE">STI</a>).
MNA can also provide a buffer against volatility. At the end of the first quarter, the ETF&#39;s underlying index had a standard deviation of just 3.27 percent, well below the comparable metrics on broad equity benchmarks.
<h3>What&#39;s Next</h3>
MNA and the IQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/qai#NYSE">QAI</a>) are IQ&#39;s two ETFs with at least $1 billion in assets under management. Those are the only two liquid alternatives ETFs to have hit the $1-billion milestone.
Related Links:
<a href="https://www.benzinga.com/news/earnings/19/04/13555790/super-semiconductor-etfs-look-for-more-upside">Soaring Semiconductor ETFs</a>
<a href="https://www.benzinga.com/trading-ideas/long-ideas/19/04/13555781/theres-still-a-case-for-buybacks">Buyback ETFs Still Thriving</a>

There are about 15,000 hedge funds out there, and both their fees and returns are very varied. But, what determines those factors?
One of the most important elements in a hedge fund&rsquo;s success is the manager. However, most people know only a few names in the space: Warren Buffett, Jim Simons, George Soros, Steve Cohen, David Einhorn, Bill Ackman, Ray Dalio, Carl Icahn, etc. And, needless to say, the fees that these guys charge are off the charts.
Now, taking into account that smaller hedge funds are expected to <a href="https://www.benzinga.com/personal-finance/financial-advisors/17/02/9000294/expert-why-smaller-hedge-funds-will-continue-to-ou#/null">continue to outperform larger ones</a>, how do these firms select their managers? How do other people get into the game? Is there space for smaller fish in the bowl?
In order to shed some light on the issue, Benzinga reached out to <a href="https://www.benzinga.com/topic/don-steinbrugge">Don Steinbrugge</a>, one of the best-known experts in the hedge fund industry. With over three decades of experience in the space, Steinbrugge has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now. Prior to that, he worked at Andor Capital and Merrill Lynch Investment Managers &mdash; now part of BlackRock, Inc. (NYSE: <a class="ticker" href="/stock/blk#NYSE">BLK</a>).
<h3>The Funnel Approach</h3>
&ldquo;When you look at the process that professional hedge funds use to select their managers, they are using a funnel approach,&rdquo; the expert commenced. &ldquo;Most professional hedge fund investors are getting contacted by thousands of managers a year, they are meeting with 100 to 500 a year, they are doing follow-up meetings with 50, and they are hiring two. So, it&#39;s one of the most competitive industries there is.&rdquo;
&ldquo;As a result of that, most of the money is going to a very small number of managers &ndash; the very largest managers and the smaller managers that not only have a great product but are also very good at articulating what their differential advantage is,&rdquo; he added.
&ldquo;One of the keys to hedge funds is, you have to be able to explain to people what inefficiency in the market you are going after, and what your differential advantage is to capture that inefficiency,&rdquo; Steinbrugge concluded. &ldquo;If people don&#39;t understand that, they won&#39;t invest; and, most hedge fund managers are very bad at explaining what they do.&rdquo;
Liked this article? Now check out Steinbrugge&rsquo;s explanation on how <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8929268/how-hedge-fund-strategies-are-shifting-lower-correlations-and">hedge fund strategies are shifting</a> toward those with lower correlations and increased volatility.

Quite often, our readers ask how to invest in hedge funds: &ldquo;I don&rsquo;t know the first thing about them. Other than Warren Buffett, who&rsquo;s good? Are the fees worth it?&rdquo;
Looking for an answer to such a common query, Benzinga reached out to <a href="https://www.benzinga.com/topic/don-steinbrugge">Don Steinbrugge</a>, one of the top experts in the hedge fund industry. After roughly two decades working in the space, at Merrill Lynch Investment Managers &mdash; now part of BlackRock, Inc. (NYSE: <a class="ticker" href="/stock/blk#NYSE">BLK</a>) &mdash; and Andor Capital, among others, Steinbrugge founded Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm that he has been running for almost 10 years now.
<h3>Let Someone Else Choose</h3>
&ldquo;For most people that don&#39;t understand hedge funds, a good way to invest in hedge funds is through what is called a fund of funds,&rdquo; the expert declared. &ldquo;It&#39;s basically a manager that invests in hedge funds; so, they might own 10 different hedge funds in their fund&mdash; and then investors will invest in their funds.&rdquo;
&ldquo;So, if you only have $500,000 to invest or $1 million to invest&mdash; If you invest in a fund of funds, you can diversify across a broad portfolio, and someone else does all the hard work of picking the managers for you,&rdquo; he continued.
<h3>The &lsquo;Double-Fees Issue&rsquo;</h3>
&ldquo;The fund of funds industry has gotten a lot of criticism because they charge a double layer of fees: you have to pay the fee of the hedge fund, and then you have to pay the fee of the fund of funds manager,&rdquo; Steinbrugge explained.
&ldquo;However,&rdquo; he went on, &ldquo;what is happening now is that, because these <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906163/hedge-fund-expert-shares-top-trends-for-2017-fees-will-contin">hedge funds are negotiating fees</a> or have sliding fees schedules, these funds of funds [that] can allocate a lot of money are getting into the hedge funds at a much lower expense level than what an individual would get on its own.&rdquo;
&ldquo;So, now if you invest in a fund of funds, the fact that they are saving so much money on fees from their underlying hedge funds more than offsets <a href="https://www.benzinga.com/personal-finance/financial-advisors/17/02/9000294/expert-why-smaller-hedge-funds-will-continue-to-ou#/null">the fees they charge</a>,&rdquo; he concluded. &ldquo;So, we [at Agecroft] think that the demand for certain funds of funds will go up because of that.&rdquo;
Liked this article? Now check out Steinbrugge&rsquo;s explanation on how <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8929268/how-hedge-fund-strategies-are-shifting-lower-correlations-and">hedge fund strategies are shifting</a> toward those with lower correlations and increased volatility.

Education

Topics

How To Invest In Hedge Funds (When You Don't Understand Them)

<a href="https://www.benzinga.com/topic/don-steinbrugge">Don Steinbrugge</a> is one of the best-known experts in the hedge fund industry, with over three decades of experience in the arena. He has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now. Prior to that, he worked at Andor Capital and Merrill Lynch Investment Managers &mdash; now part of BlackRock, Inc. (NYSE: <a class="ticker" href="/stock/blk#NYSE">BLK</a>).
Benzinga recently had the chance to chat with this seasoned expert, who shared some predictions for trends in the hedge fund industry in 2017. In the first part of this series, we looked into <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906163/hedge-fund-industry-expert-don-steinbrugge-shares-top-trends-">hedge fund fees and how they&rsquo;ll evolve</a> over the year; in the second part, we went into the why hedge funds will <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906335/hedge-fund-industry-expert-don-steinbrugge-on-trump-administr">benefit under the Trump administration</a>; in the third part, we took a look at asset outflows and <a href="http://www.benzinga.com/personal-finance/financial-advisors/17/01/8906368/hedge-fund-expert-don-steinbrugge-on-money-flows-a">why pension funds invest in hedge funds</a>; in the fourth part, we had the chance to get to know Streinbrugge&rsquo;s <a href="https://www.benzinga.com/general/hedge-funds/17/01/8929397/q-a-with-hedge-fund-industry-expert-don-steinbrugge-rituals-role-m">rituals and role models</a> better; and, in a fifth part, we talked about <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8929268/how-hedge-fund-strategies-are-shifting-lower-correlations-and">shifting hedge fund strategies</a>. In this sixth piece, we&rsquo;ll look into the reasons to believe that smaller managers will continue to outperform larger ones.
<h3>The Problem With Large Managers</h3>
&ldquo;One of the biggest problems with the hedge fund industry is that roughly 70 percent of assets have gone to hedge fund managers with $5 billion or more under management. And, there is an inverse correlation in how much money you manage and the returns you generate,&rdquo; the expert commenced.
In fact, over 2016, smaller funds very comfortably outperformed larger ones. Thru November, the HFRI Fund weighted composite had gained 4.54 percent, while the HFRI dollar weighted composite was up only 1.9 percent.
&ldquo;If you get too big, it&#39;s a lot harder to generate strong returns because you begin to move the market,&rdquo; Steinbrugge explicated. &ldquo;A lot of hedge fund managers focus on inefficiencies in the market; they focus on niche strategies. And, if you try to put a lot of money into a niche strategy, you are going to move the market both when you buy and when you sell, and your performance is going to be hurt because of it.&rdquo;
&ldquo;So, what we [at Agecroft] believe is that small managers are the ones that are going to generate the best returns, and it just so happens that they are also offering the best deal on pricing of their funds, because of the founder&#39;s share they are offering,&rdquo; he added.
<h3>Pension Funds Coming In</h3>
&ldquo;There&#39;s been a big hesitation of pension funds to invest in smaller managers,&rdquo; he ended. &ldquo;Up until now, they preferred to go with the largest funds. But, I think a lot of them are beginning to realize that, if all you do is invest in the largest funds, your returns on your hedge fund portfolio are going to be mediocre. So, there is a trend in the industry for pension funds to kind of move down the size/scale of hedge funds, and I think you&#39;ll see more invested in mid-sized hedge funds in order to enhance their returns.&rdquo;

Expert: Why Smaller Hedge Funds Will Continue To Outperform Larger Ones

<a href="https://www.benzinga.com/topic/don-steinbrugge">Don Steinbrugge</a> is one of the best-known experts in the hedge fund industry, with over three decades of experience in the field. He has been running <a href="http://www.agecroftpartners.com/">Agecroft Partners</a>, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now.
Benzinga had the chance to chat with this seasoned hedge fund industry expert, who shared some predictions for trends in the space in 2017. In the first part of this article, we looked into <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906163/hedge-fund-industry-expert-don-steinbrugge-shares-top-trends-">hedge fund fees and how they&rsquo;ll evolve</a> over the year; in the second part, we went into the why hedge funds will <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906335/hedge-fund-industry-expert-don-steinbrugge-on-trump-administr">benefit under the Donald Trump administration</a>. In this third part, we&rsquo;ll take a look at asset outflows and why pension funds invest in hedge funds.
<h3>Pension Funds</h3>
The expert first explained why pension funds invest in hedge funds. &ldquo;[The objective of] most pension funds that are allocating [resources] to hedge funds is not to beat equities, their objective is really to beat fixed income. These pension funds need to be diversified; they can&#39;t have 100 percent in equities, because if the market sells off, at some point, they may not be able to pay pension benefits. So, if hedge funds can outperform their fixed income portfolio, provide uncorrelated returns (that don&#39;t move in the same direction as the bond or equity market) and also help the pension funds if the markets sell off, that adds value to the pension fund.&rdquo;
&ldquo;So, that&#39;s why they are investing. They are investing to beat bonds &ndash; and their bond portfolio right now is projected to generate somewhere around 2.5 or 3 percent,&rdquo; he continued. &ldquo;So, it&#39;s not a very high bar for hedge funds to meet in order to add value to these pension funds &mdash; last year, the average hedge fund was up about 5.6 percent and the Bloomberg Barclays US Aggregate Bond Index was only up about 2.5 percent.&rdquo;
&ldquo;Despite that, the assets coming out of pensions are going to be a lot less than most people think,&rdquo; he added.
<h3>Money Flow</h3>
Among the trends Agecroft predicts for 2017, there&rsquo;s &ldquo;a lot of negative flows or money coming out of the marketplace from large institutional investors. They are getting a lot of pressure from local media, from politicians, and from union employees, to get rid of their hedge funds,&rdquo; Steinbrugge explicated.
&ldquo;And, there&#39;s a disconnect between most people&#39;s impression of hedge funds and why institutional investors are investing in hedge funds. One of those disconnects is relative to performance. A lot of people compare the return of hedge funds to the S&amp;P 500 and the SPDR S&amp;P 500 ETF Trust (NYSE: <a class="ticker" href="/stock/spy#NYSE">SPY</a>), and the reality is that is not the benchmark investors use for their hedge fund portfolio.&rdquo;
&ldquo;Hedge funds are a fund structure, and within that fund structure there are a lot of different strategies that have no correlation to the S&amp;P 500 [...] You have money market funds, bond funds&mdash; For equity funds, you probably should compare those to the S&amp;P 500, but most strategies [among hedge funds] don&#39;t have a lot of equity exposure,&rdquo; he went on.
&ldquo;Now, even though I do think that net flows to the hedge fund industry are going to be negative, I think in 2017 hedge fund assets will reach an all-time high,&rdquo; the expert declared. &ldquo;The average estimate is like $3 trillion. Last year, about 2.5 percent of the industry assets left, but the average return across hedge funds was 5.6 percent, so the performance offset the net redemption, which caused assets to be at an all-time high. And, I think we are going to see the same thing in 2017: We are projecting 3 percent net redemption from the industry, but we are forecasting an average return of 5 percent. So, we are expecting industry assets to be up about 2 percent at the end of the year.&rdquo;

Hedge Fund Expert Don Steinbrugge On Money Flows And Why Pension Funds Invest In Hedge Funds

Don Steinbrugge is one of the best-known experts in the hedge fund industry, with over three decades of experience in the field. He has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now.
Benzinga had the chance to chat with this seasoned hedge fund industry expert, who shared some predictions for trends in the space in 2017. In the first part of this article, we looked into <a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8906163/hedge-fund-industry-expert-don-steinbrugge-shares-top-trends-">hedge fund fees and how they&rsquo;ll evolve</a> over the year; in this second part, we&rsquo;ll go into the expert&rsquo;s explanation of why hedge funds will benefit under the Donald Trump administration.
<h3>Correlations And Volatility</h3>
&ldquo;We think hedge funds, especially long/short equity [funds] should do better with the election of Donald Trump as the president,&rdquo; Steinbrugge voiced, expounding that, in contrast, over the past few years, long/short equity managers have had a tough time outperforming the market because:
<ul>
<ol>
<li>&ldquo;Correlations, or the relative movement of stocks, has been very high.&rdquo;</li>
<li>&ldquo;At the same time, the volatility, or the movement of stock prices, has been really low.&rdquo;</li>
</ol>
</ul>
&ldquo;This has been driven by an accommodating Fed &mdash; and monetary authorities all around the world trying to stimulate their economies,&rdquo; the expert added. &ldquo;That, and a lot of money going into ETFs and index funds, has caused the relative movement to be very high.&rdquo;
&ldquo;If you are a long/short equity manager, you are trying to buy stocks you think are going to go up, and you are trying to sell short stocks you think are going to go down,&rdquo; Steinbrugge went on. &ldquo;And if the stocks you sell short go down, and the stocks you go long go up, you make a lot of money; but, if they are all moving kind of in the same direction, it&#39;s difficult to generate strong returns.&rdquo;
&ldquo;So, with Trump as a new president, we think it&#39;s going to cause a lot more volatility in the marketplace, because his whole agenda is to make change. And when you have change, certain companies and certain industries are going to benefit relative to others.&rdquo;
<h3>The Risks</h3>
&ldquo;In general, the market is pretty positive on Trump, but there&#39;s risk with Trump,&rdquo; Steinbrugge commented. &ldquo;There&#39;s a possibility that some of his policies might not go through, or that he might do something that might cause the markets to sell off.&rdquo;
&ldquo;So, we think correlations are going to go down between stocks, volatility is going to go up, and that is going to make it easier for long/short equity managers to generate returns,&rdquo; he concluded.
Image Credit: By Gage Skidmore from Peoria, AZ, United States of America - Donald Trump, CC BY-SA 2.0, <a href="https://commons.wikimedia.org/w/index.php?curid=52646488">via Wikimedia Commons</a>

Short Ideas

Politics

Hedge Fund Expert On Trump Administration: 'Long/Short Equity Managers Will Benefit'

Don Steinbrugge is one of the best-known experts in the hedge fund industry, with over three decades of experience in the field. He has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now.
Prior to Agecroft, Steinbrugge spent 18 years working with institutional investors, serving as the head of institutional sales for Merrill Lynch Investment Managers &mdash; now part of BlackRock, Inc. (NYSE: <a class="ticker" href="/stock/blk#NYSE">BLK</a>) &mdash; and then as founding principal of Andor Capital, the second largest hedge fund firm in the world at the time.
Benzinga had the chance to chat with this seasoned hedge fund industry expert, who shared some predictions for trends in the space in 2017. In this article, we&rsquo;ll look into hedge fund fees and their evolution.
<h3>The Evolution Of Fees</h3>
Agecroft&rsquo;s first prediction concerns the continuation in the evolution in hedge fund fees.
&ldquo;Hedge funds historically had two different types of fees; one was a management fee, and that was a percent of the assets, and, if you went back 10 years ago, the average hedge fund was getting about 2 percent management fee per year. The second fee they get is a performance fee, and traditionally, it&#39;s been 20 percent of whatever performance they generate. And they get both,&rdquo; Steinbrugge explicated.
However, he continued, &ldquo;there&#39;s been a lot of fee pressure put on hedge funds over the past five years and, as a result of that, hedge fund fees are coming down in a number of different ways:&rdquo;
<ul>
<ol>
&ldquo;Most of the hedge fund money is going to very large hedge funds. Roughly 70 percent of assets are with hedge funds that have $5 billion or more [in assets under management]. There are 15,000 hedge funds and a majority of those are below $100 million. And, last year, only 5 percent of assets went to hedge fund managers with less than $100 million in assets [under management]. So, these managers are having a great amount of difficulty raising money. A trend in the hedge fund industry is that they are coming out with something called &#39;founders share,&#39; which are huge discounts on fees for investors who invest early, when the hedge fund is small. Then, those fees are grandfathered once assets get above $150 million or $200 million.&rdquo;
<li>&ldquo;Fees are also coming down significantly for large pension funds [...] What hedge funds have begun to do is scale their fees. Basically, the more money you invest, the lower the fee.&rdquo;</li>
<li>&ldquo;Another thing hedge funds are doing is negotiating fees with these large managers. What they are trying to do is really tailor the fee to the needs of a large pension fund [...] [In addition, hedge funds] are willing to consider a hurdle, which is basically: &#39;you have to return a certain percent before the performance fee kicks in.&#39; And, they are also willing to negotiate kind of a crystallization period of the performance fee; so, typically the performance fee is payed once a year, and some of these institutional investors are asking hedge funds to lengthen the crystallization period after three years.&rdquo;</li>
</ol></ul>

Hedge Fund Expert Shares Top Trends For 2017: 'Fees Will Continue To Evolve'

Prior to the widespread availability of the internet, Wall Street insiders had a huge advantage when it came to access to information about public companies. Individual investors would often read about market-moving news in the newspaper the next day or in a company&rsquo;s annual report once it arrived in the mail.
Today, market moving news spreads nearly instantaneously via online newswires and social media. Since most legal public data about a company are widely available on the internet and non-public inside information is illegal, hedge funds and other professional traders have turned to the use of &ldquo;alternative data&rdquo; to gain an edge.
This alternative data is information about a company that is non-financial in nature but nevertheless provides insight into the business activities of a company. Social media sentiment data are prime examples of alternative data.
The Financial Times&rsquo; Alexandra Scaggs <a href="http://ftalphaville.ft.com/2016/09/13/2174708/in-defence-of-hedge-fund-data-mining/">recently highlighted</a> the subtleties of alternative data.
&ldquo;The information is proprietary &ndash; as in, a mom-and-pop investor couldn&rsquo;t get the same thing &ndash; but it&rsquo;s fine to trade on because it hasn&rsquo;t come from the company , or from someone with a special confidential relationship to the company, like a banker on a deal,&rdquo; <a href="http://ftalphaville.ft.com/2016/09/13/2174708/in-defence-of-hedge-fund-data-mining/">Scaggs wrote</a>.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/fintech/16/09/8457355/wells-fargo-blasted-on-social-media-following-fraud-settlement">Wells Fargo Blasted On Social Media Following Fraud Settlement</a></bzrelatedlink>
Startups like Quandl sell alternative data to hedge funds for a hefty price. Some traders argue that data aren't truly public if only wealthy Wall Street funds can afford it. The funds themselves and the companies that compile the alternative data argue that the data is public if you have the sophistication and technology to collect and interpret it.
One thing seems certain: It&rsquo;s getting harder and harder for financial professionals to gain an edge over retail traders. While most retail investors would say that&rsquo;s good news, it makes it more and more difficult for funds to outperform.
So far in 2016, the IQ Hedge MultiQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>) is up 2.3 percent, while the SPDR S&amp;P 500 ETF Trust (NYSE: <a class="ticker" href="/stock/spy#NYSE">SPY</a>) is up 4.9 percent.
<a href="https://pro.benzinga.com/?utm_source=Benzinga&amp;utm_medium=Benzinga%20Top%20of%20Article&amp;am%22%3">Full ratings data available on Benzinga Pro.</a>
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Tech

Hedge Fund Mining Draws Ire; Is The 'Alternative-Data' Playing Field Rigged?

Investors withdrew more than $25 billion last month from hedge funds at a time when many insiders are claiming the industry is "under assault."
According to <A href="https://www.bloomberg.com/gadfly/articles/2016-08-25/hedge-fund-bloodletting-should-prompt-contemplation">Bloomberg Gadfly's Christopher Langner,</a> the mass exodus of customers out of hedge funds is not a sign that the industry is dying, but it is shrinking.
Langner noted that July's redemption data are the worst in terms of redemptions since February 2009, and they are slightly above June's total net outflow of $23.5 billion.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/16/05/7978314/leon-cooperman-thinks-the-hedge-fund-industry-is-under-a">Leon Cooperman Thinks The Hedge Fund Industry Is Under Attack</a></bzrelatedlink>
However, he pointed out the hedge fund industry manages a staggering $2.7 trillion, making this year's total redemptions of $55.9 billion look like "a drop in the ocean."
Langner continued that there has been a strong inflow to hedge funds since 2009, so it is only "natural" that investors are taking money off the table. Also, commodity related hedge funds continue to attract new money this year and has seen a total net inflow of $10.3 billion over the past 14 months.
"Those two facts seem to support the idea that the latest move is more of an adjustment than a final breath for the industry," Langner stated. "The majority of redemptions happened among money-losing funds, and inflows were recorded for those that gained more than 7 percent this year."
Bottom line, it will take "dozens of bad months like July" before the hedge fund industry faces any sort of threat to its existence. It is, however, a good time for hedge fund managers to "rethink their ways."
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Media

Hedge Funds Are Still Very Much Alive

The third-quarter 13F filing season confirmed at least one thing about exchange-traded funds: Hedge funds are increasing their use of ETFs.
 In fact, it can be said that hedge funds are big reason why earlier this year, ETFs eclipsed hedged funds in terms of <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/09/5854713/etfs-are-bigger-than-hedge-funds-and-hedge-funds-are-a-big-re">total assets under management</a>.
As recent 13F filings reveal, plenty of hedge funds do sell their ETF holdings. For example, Ray Dalio&#39;s Bridgewater Associates trimmed its stakes in the Vanguard Emerging Markets Stock Index Fd (NYSE: <a class="ticker" href="/stock/vwo#NYSE">VWO</a>) and the iShares MSCI Emerging Markets Indx (ETF) (NYSE: <a class="ticker" href="/stock/eem#NYSE">EEM</a>), the two largest <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5987035/waiting-for-godot-emerging-markets-etfs-try-to-get-it-togethe">emerging markets ETFs</a>, during the third quarter. Other hedge funds did the same.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/10/5931723/why-are-so-many-key-hedge-funds-closing-down">Why Are So Many Key Hedge Funds Closing Down?</a></bzrelatedlink>
<h3>Hedge Funds' Focus</h3>
As <a href="http://trymsatoday.com/">S&amp;P Capital IQ</a> highlighted in a note out Thursday, hedge funds were voracious buyers of consumer staples stocks during the third quarter, which likely helped bolster the fortunes of the Consumer Staples Select Sect. SPDR (ETF) (NYSE: <a class="ticker" href="/stock/xlp#NYSE">XLP</a>). XLP, the largest consumer staples ETF by assets, is up 3.6 percent year-to-date. That is good for the fourth-best showing among the nine legacy sector SPDR ETFs, and impressive when considering staples are viewed as sensitive to changes in interest rates.
Ahead of a possible interest rate hike by the Federal Reserve before the end of this year, some hedge funds also stepped into the Select Sector Financial Slct Str SPDR Fd (NYSE: <a class="ticker" href="/stock/xlf#NYSE">XLF</a>) in the third quarter. There are also ETFs that bring hedge fund-esque strategies to everyday investors, including the Global X Guru Index ETF (Global X Funds (NYSE: <a class="ticker" href="/stock/guru#NYSE">GURU</a>)) and the IQ Hedge MultiIQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>).
<h3>A Closer Look: GURU And QAI</h3>
GURU &ldquo;is one of the various ways individuals can invest in stocks held by hedge funds,&rdquo; said S&amp;P Capital in the note.
&ldquo;The ETF is comprised of the top U.S. listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and concentrated holdings. From a sector perspective, consumer discretionary and financials were the largest, while technology was underweighted relative to the S&amp;P 500 index due we think in part to recent hedge fund selling activity,&rdquo; S&amp;P Capital IQ shared.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/trading-ideas/long-ideas/15/11/5992887/wisdomtree-adds-to-currency-hedged-suite-with-small-cap-divid">WisdomTree Adds To Currency-Hedged Suite With Small-Cap Dividend ETF</a></bzrelatedlink>
In September, GURU was awarded the prestigious five-star rating from Morningstar for the large blend category.
The IQ Hedge Multi-Strategy Tracker ETF, which has over a $1 billion in assets, making it one of the largest hedge fund strategy ETFs, is an ETF of ETFs. That means essentially all QAI&#39;s holdings, both long and short positions, are other ETFs from asset classes including bonds, real estate and stocks.
&ldquo;QAI seeks to replicate the return profiles of different hedge fund strategies such as merger arbitrage, event driven, equity long/short and market neutral. QAI, which holds other ETFs and not individual stocks, is rebalanced monthly. The largest such ETF is IQ Hedge Alternative (QAI), which has $1 billion in assets. QAI has a 0.91 percent expense ratio and was down only 1.6 percent year to date,&rdquo; said S&amp;P Capital IQ.
Image Credit: <a href="https://pixabay.com/en/mountain-landscape-nature-epic-941507/">Public Domain</a>

Analyst Color

Intraday Update

GURU

Be Your Own Hedge Fund Legend With ETFs

<li>This year has been the worst year for hedge fund shutdowns since 2008.</li>
<li>More than 400 funds shut down in the first half of the year.</li>
<li>Of the remaining funds, average 2015 returns are nearly flat.</li>

	There&rsquo;s no doubt about it: 2015 has been a rough year for hedge funds. New data from Bloomberg indicates that more funds have shut down this year than in any other year since the Financial Crisis. Here&rsquo;s a look at just how bad it&rsquo;s gotten.
<h3>The Numbers</h3>
According to Bloomberg, the total combined assets of the hedge funds that have shut down so far this year is about $16 billion. A whopping 417 hedge funds closed down in the first half of 2015 alone. Although that number puts this year&rsquo;s shutdowns well behind pace of 2008&#39;s 1,471 total hedge fund shutdowns, it&rsquo;s safe to say that market conditions in 2008 and market conditions today couldn&rsquo;t be more different.
	<img alt="" src="/files/u81483/capture_3.png" style="width: 480px; height: 489px;" />
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/15/10/5917824/hedge-funds-are-fleeing-stocks-one-chart-tells-the-story">Hedge Funds Are Fleeing Stocks: One Chart Tells The Story</a></bzrelatedlink>
<h3>Big Names</h3>
	The list of funds that have been shut down so far this year includes some large, well-known funds. Just this month, Renaissance Technologies closed its $1 billion futures fund due to lack of investor interest. Bain Capital also announced this month that it is closing its $2.2 billion Absolute Return Capital fund after three years of negative returns.
<h3>Scraping By</h3>
It&rsquo;s not just the funds that are shutting down that have been struggling in 2015. As of October 15, the average hedge fund had returned a paltry 0.18 percent <a href="http://www.businessinsider.com/hedge-funds-returns-in-2015-2015-10">this year</a>. Even some of the biggest names in the business have fallen victim to unpredictable market conditions this year. Through the end of September, some of the biggest losers in 2015 include Bill Ackman&rsquo;s Pershing Square Holdings (-9.6 percent), John Paulson&rsquo;s Paulson Advantage (-12.0 percent), Leon Cooperman&rsquo;s Omega Overseas Partners (-12.0 percent) and David Einhorn&rsquo;s Greenlight Capital Offshore (-16.8 percent).
The IQ Hedge MultiQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>) is down 1.1 percent this year.
	Disclosure: The author holds no position in the stocks mentioned.
Image Credit: <a href="https://pixabay.com/en/board-door-goal-shutters-metro-895399/">Public Domain</a>

Why Are So Many Key Hedge Funds Closing Down?

New York Life Investment Management To Acquire IndexIQ; No Terms Disclosed

Another <a href="http://www.benzinga.com/news/12/08/2812549/advisorshares-to-introduce-equity-hedge-etf">hedge fund ETF</a> 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 <a href="https://www.hedgefundresearch.com/mon_register/index.php?fuse=login_bd&amp;1344429289">Hedge Fund Research</a> 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&amp;P, <a href="http://finance.yahoo.com/blogs/breakout/">according to Breakout on Yahoo Finance</a>.

Translation: Owning the SPDR S&amp;P 500 (NYSE: <a class="ticker" href="/stock/spy#NYSE">SPY</a>) 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: <a class="ticker" href="/stock/qai#NYSE">QAI</a>)
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: <a class="ticker" href="/stock/lqd#NYSE">LQD</a>), the Vanguard Total Bond Market ETF (NYSE: <a class="ticker" href="/stock/bnd#NYSE">BND</a>) and the iShares MSCI EAFE Index Fund (NYSE: <a class="ticker" href="/stock/efa#NYSE">EFA</a>).

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: <a class="ticker" href="/stock/mcro#NYSE">MCRO</a>)
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: <a class="ticker" href="/stock/eem#NYSE">EEM</a>) and the Vanguard MSCI Emerging Markets ETF (NYSE: <a class="ticker" href="/stock/vwo#NYSE">VWO</a>). 

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: <a class="ticker" href="/stock/alfa#NYSE">ALFA</a>)
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: <a class="ticker" href="/stock/aapl#NASDAQ">AAPL</a>), Google (NASDAQ: <a class="ticker" href="/stock/goog#NASDAQ">GOOG</a>), PepsiCo (NYSE: <a class="ticker" href="/stock/pep#NYSE">PEP</a>) and Intel (NASDAQ: <a class="ticker" href="/stock/intc#NASDAQ">INTC</a>). 

ALFA is not cheap at 0.95 percent per year, but AlphaClone <a href="http://blog.alphaclone.com/files/Downloads/Case%20for%20Alternative%20Alpha.pdf">makes a compelling case for its index methodology</a>. That is to say, ALFA could actually outperform SPY going forward. 

iShares Diversified Alternatives Trust (NYSE: <a class="ticker" href="/stock/alt#NYSE">ALT</a>)
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 <a href="http://us.ishares.com/product_info/fund/holdings/ALT.htm">means futures contracts</a>.

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.

For more on ETFs, click <a href="http://www.benzinga.com/etfs">here</a>.

New ETFs

AAPL

ALFA

GOOG

INTC

MCRO

Are Hedge Fund ETFs Worth The Trouble?

First Trust, the tenth-largest U.S. ETF issuer by assets, has filed plans with the Securities and Exchange Commission to possibly list a hedge fund ETF becoming the latest ETF sponsor to look to make inroads in this niche.

The First Trust Hedge Fund Manager Holdings Index Fund will track an index that measures the performance of the 100 largest publicly traded positions in equities and equity-related securities reported in Form 13F filings that hedge fund managers file with the SEC 45 days after the end of each quarter, according to <a href="http://www.indexuniverse.com/sections/news/11529-first-trust-plans-hedge-fund-related-etf.html">Index Universe</a>.

The fund will track the Wells Fargo Hedge Fund Manager Holdings Index, which is comprised of stocks trading on the Nasdaq and New York Stock Exchange.

In late March, Global X filed plans for several <a href="http://www.benzinga.com/trading-ideas/long-ideas/12/03/2447953/global-x-files-for-air-jordan-etfs-qai-sil-ura">hedge fund ETFs of its own</a>.

The hedge fund ETF space is currently occupied by funds such as the The IndexIQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>), the Credit Suisse Merger Arbitrage Liquid Index ETF (NYSE: <a class="ticker" href="/stock/csma#NYSE">CSMA</a>) and the ProShares Hedge Replication ETF (NYSE: <a class="ticker" href="/stock/hdg#NYSE">HDG</a>). 

Among First Trust's more popular ETFs are the First Trust NYSE Arca Biotechnology Index Fund (NYSE: <a class="ticker" href="/stock/fbt#NYSE">FBT</a>) and the First Trust Dow Jones Internet Index Fund (NYSE: <a class="ticker" href="/stock/fdn#NYSE">FDN</a>). Illinois-based First Trust had 69 funds with $7.8 billion in assets under management at the end of March, according to ETF Industry Association data.

After-Hours Center

CSMA

First Trust NYSE Arca Biotechnology Index Fund

First Trust Dow Jones Internet Index Fund

First Trust May Join Hedge Fund ETF Fray

Global X, the New York-based ETF issuer known for its unique and often first-to-market emerging markets and sector ETFs, has filed plans with the Securities and Exchange Commission to possibly introduce a quarter of unusual ETFs designed to offer investors exposure to various hedge fund and value investing strategies.

The funds Global X filed for are the Global X Top Hedge Fund Equity Holdings ETF, Global X Top Value Guru Holdings ETF, Global X Top Activist Investor Holdings ETF and Global X Listed Hedge Funds ETF.

The Hedge Fun Equity Holdings ETF will track the Solactive Top Hedge Fund Equity Holdings Index while the Value Guru ETF will follow the Solactive Top Value Guru Holdings Index. Global X's Top Activist Investors Holdings ETF will be linked to the Solactive Top Activist Investor Holdings Index while the Listed Hedge Funds ETF will follow the Solactive Listed Hedge Funds Index.

Some hedge fund replication ETFs have proven successful with investors. The IndexIQ Hedge Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>) has about $200 million in AUM while the Credit Suisse Merger Arbitrage Liquid Index ETF (NYSE: <a class="ticker" href="/stock/csma#NYSE">CSMA</a>) has about $90 million in AUM. The IndexIQ Hedge Macro Track ETF (NYSE: <a class="ticker" href="/stock/mcro#NYSE">MCRO</a>) is further down the list with over $40 million in assets.

Investors may not be able to pass up the opportunity to channel their inner Steve Cohen or Louis Bacon, but as the Global X filing notes, it's really common sense, and kudos to <a href="http://blogs.barrons.com/focusonfunds/2012/03/26/etfs-for-hedge-funds-stock-picks-value-guru-portfolios/">Barron's for pointing it out</a> "The 13F filings used to select the securities in the Underlying Index are filed by each hedge fund approximately 45 days after the end of each calendar quarter. As a result, a given hedge fund may not hold the position at the time when the position is added to the Underlying Index."

Translation: The SEC can tell investors what Cohen, Warren Buffett and other heavy hitters have OWNED, not always what they are currently holding. Hence "Air Jordan" in our title. These ETFs may help you look like the biggest names on the Street, but there are no guarantees they'll replicate the success of investing legends.

Global X had 40 ETFs and over $1.4 billion in AUM at the end of February, according to data from the ETF Industry Association. Some of the firm's largest funds include the Global X Silver Miners ETF (NYSE: <a class="ticker" href="/stock/sil#NYSE">SIL</a>) and the Global X Uranium ETF (NYSE: <a class="ticker" href="/stock/ura#NYSE">URA</a>).

Broad U.S. Equity ETFs

Movers & Shakers

Global X Files For "Air Jordan" ETFs (QAI, SIL, URA)

Four Hedge Fund ETFs Your Broker Forgot To Tell You About

Some kids grow up dreaming about becoming movie stars or athletes. That's understandable, but some adults (and maybe some kids, too) fantasize about becoming hedge fund managers. 

If you've ever found yourself day-dreaming about becoming the next Steven Cohen or Bill Ackman, no one would blame you. After all, those guys have more money than most movie stars and athletes. Still, realizing that dream is easier said than done, but if you want to play hedge fund manager with your own portfolio, there's an ETF for that.

Actually, there are plenty of hedge fund replication ETFs, many of which your broker forgot to mention. Here a few funds that will help channel your inner hedge fund guru.

iShares Diversified Alternatives Trust (NYSE: ALT):
The iShares Diversified Alternatives Trust makes no bones about it. Right there on the iShares Web page, this ETF is described as NOT a traditional ETF. The objective of the iShares Diversified Alternatives Trust is to “maximize absolute returns from investments with historically low correlation to traditional asset classes while seeking to control the risks and volatility inherent in futures and forward contracts by taking long and short positions in historically correlated assets,” according to iShares.

Nearly two years old, ALT has done a fine job of attracting assets with nearly $128 million undeer management. Just be aware of the high expense ratio at 0.95%.

IQ Hedge Fund Multi-Strategy Tracker ETF (NYSE: <a class="ticker" href="/stock/qai#NYSE">QAI</a>):
The IQ Hedge Fund Multi-Strategy Tracker ETF seeks to deliver a performance that is comparable to the hedge fund universe at large. These days that might not be such a good thing as some of the biggest names in the hedge fund game are struggling to generate alpha. QAI uses myriad strategies, including long/short equity, fixed income arbitrage, global macro and emerging markets to accomplish its objective. 

Perhaps the biggest advantage with the IQ Hedge Fund Multi-Strategy Tracker is that IQ Global is one of the top issuers of hedge fund ETFs and in a favorable market environment, QAI has legitimate alpha-generating potential.

ProShares Hedge Replication ETF (NYSE: HDG):
ProShare is the biggest issuer of inverse and leveraged ETFs, so the ProShares Hedge Replication ETF is somewhat of a departure for this ETF issuer. HDG is still less than two months old, but the approach is novel as this new ETF tracks an index that follows a universe of 2,000 different hedge funds.

IQ Merger Arbitrage ETF (NYSE: <a class="ticker" href="/stock/mna#NYSE">MNA</a>):
As we have noted many times in the past, the IQ Merger Arbitrage ETF is not a play on increased mergers and acquisitions activity. MNA is an arbitrage play on companies for which public takeover announcements have already been made. The index that the IQ Merger Arbitrage ETF tracks also includes a short position in global stocks as a hedge.

Four Hedge Fund ETFs Your Broker Forgot To Tell You About

Barron's had some interesting stuff on both emerging markets and ETFs.
There was a <a href="http://online.barrons.com/article/SB50001424053111904405004576441963271162674.html?mod=BOL_twm_fs#articleTabs_panel_article%3D1%26articleTabs%3Darticle">point counter point</a> about emerging markets with Jim O'Neill from Goldman Sachs as the bull and Richard Bernstein as the bear. First a tip of the hat to O'Neill for making a point I have been making for a while now which is that the term emerging markets is out of date.
It was odd that Barron's did not find another emerging market analyst to make the bear case; Bernstein is more of a strategist and the mutual fund he runs is pretty broad. I took Bernstein's argument to be more of a short term argument and that he thinks emerging markets will lead again in a couple of years or so.
<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/-DshroZTusUM/TiNWp4OofAI/AAAAAAAAEBQ/Aauj0BLC330/s1600/six%2Baxle.jpg"><img style="float:left; margin:0 10px 10px 0;cursor:pointer; cursor:hand;width: 320px; height: 180px;" src="http://1.bp.blogspot.com/-DshroZTusUM/TiNWp4OofAI/AAAAAAAAEBQ/Aauj0BLC330/s320/six%2Baxle.jpg" alt="" id="BLOGGER_PHOTO_ID_5630439236611636226" border="0" /></a>Both pointed to potential issues with inflation in some countries as being problematic, we know that China and Brazil are on the front burner for this issue. Given the global back drop and what appears to be secular problems that are nowhere near being solved for the US, Big Western Europe and Japan the cyclical threats cited in the article about emerging markets are small potatoes. If you are one to trade around cyclical events, of which I am not critical, you need to realize that a downturn is not the same thing as a decade-long roundtrip to nowhere.
The <a href="http://online.barrons.com/article/SB50001424053111904637304576433780508334912.html?mod=BOL_twm_ls">cover story</a> this week was about finding the best yielding ETFs. Unfortunately the article failed to mention that past dividends cannot be counted on in the future. There was a positive mention of client holding iShares TIPS ETF (<a class="ticker" href="/stock/tip#">TIP</a>) because the yield now annualizes out to 4%. TIP is a monthly pay but there have been quite a few months where there has been no payout.
I also thought <a href="http://online.barrons.com/article/SB50001424053111904582604576432140042746566.html?mod=BOL_twm_fs">Murray Coleman's piece</a> on what he called hedge fund strategies was useful although I would have included the Index IQ Multi Strategy Tracker ETF (<a class="ticker" href="/stock/qai#">QAI</a>) which in the context of absolute return has done very well.
An entire portfolio of alternatives would turn out to be a dreadful longterm mistake but as a tool for managing volatility over the course of an entire stock market cycle a modest allocation has been very important before and will be in the future. It is well worth your time understanding the space an incorporating them in from time to time.
We saw this three axled thing in town the other night. I've seen them before of course, very neat looking. 
<div class="blogger-post-footer"><img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/8532070-9183563519400515103?l=randomroger.blogspot.com' alt='' /></div>

Barron's Dissects ETFs and Emerging Markets

The parade of new exchange traded product launches continues unabated.  Last week, nine new products came to market consisting of six ETFs and three ETNs.  One of the new ETFs was from Precidian, a new sponsor in the ETF arena, and another is actively managed.
A brief overview of the new products and my analysis/opinion of each follows this list containing names, ticker symbols, and launch dates:
<ol>
<li>iPath Long Enhanced S&amp;P 500 VIX Mid-Term Futures ETN (<a class="ticker" href="/stock/vzzb#">VZZB</a>) 7/11/11</li>
<li>iPath US Treasury 5-Year Bull ETN (DFVL) 7/12/11</li>
<li>iPath US Treasury 5-Year Bear ETN (DFVS) 7/12/11</li>
<li>IQ Emerging Markets Mid Cap ETF (EMER) 7/13/11</li>
<li>Market Vectors CEF Municipal Income ETF (<a class="ticker" href="/stock/xmpt#">XMPT</a>) 7/13/11</li>
<li>MAXIS Nikkei 225 Index Fund (<a class="ticker" href="/stock/nky#">NKY</a>) 7/13/11</li>
<li>ProShares Hedge Replication ETF (HDG) 7/14/11</li>
<li>Schwab US Aggregate Bond ETF (SCHZ) 7/14/11</li>
<li>WisdomTree Global Real Return Fund (RRF) 7/14/11</li>
</ol>
 
iPath Long Enhanced S&amp;P 500 VIX Mid-Term Futures ETN II (<a class="ticker" href="/stock/vzzb#">VZZB</a>) provides an initial 200% exposure (without any leverage reset) to mid-term VIX futures.  <a href="http://investwithanedge.com/vzz-terminates-and-vzzb-fills-the-void" target="_blank">VZZB is a replacement for VZZ</a>, which triggered an early termination on July 1, 2011.
Opinion:  Given the possibility of early termination with “no-reset” leveraged products, I suspect traders formerly using VZZ may migrate to products with a longer shelf life versus switching to VZZB.
 
iPath US Treasury 5-Year Bull ETN (DFVL) and iPath US Treasury 5-Year Bear ETN (DFVS) will track the Barclays Capital 5 Year US Treasury Futures Targeted Exposure Index.  The index is designed to increase in response to a decrease in 5-year Treasury note yields and to decrease in response to an increase in 5-year Treasury note yields.  DFVL employs an index multiplier that provides a participation rate of $0.10 gain or loss per each 1.00 point increase or decrease, respectively, in the level of the index, while DFVS does the opposite.  The ETNs have annual investor fees of 0.75% (<a href="http://www.ipathetn.com/DFVL-overview.jsp" target="_blank">DFVL overview</a> and <a href="http://www.ipathetn.com/DFVS-overview.jsp" target="_blank">DFVS overview</a>). 
Opinion:  These products are 5-year versions of <a href="http://investwithanedge.com/barclays-launches-six-etns-for-custom-yield-curve-strategies" target="_blank">existing 2-year, 10-year, and long-term Treasury yield ETNs</a>.  They are potentially useful for investors wanting to construct customized yield curve exposure. 
 
IQ Emerging Markets Mid Cap ETF (EMER) seeks to provide the performance (minus the 0.75% expense ratio) of a float-adjusted market cap-weighted index of the mid-capitalization segment of stocks from emerging markets.  Largest country allocations go to Taiwan 22.8%, South Korea 13.0%, South Africa 11.7%, China 10.8%, and Brazil 9.4%.  Sectors with weightings above 10% are Consumer Discretionary 18.7%, Financials 18.1%, Industrials 15.9%, and Materials 13.3%.  The underlying index has 348 stocks, with none exceeding a 1% weighting (<a href="http://www.indexiq.com/etfs/international/iq-emerging-markets-mid-cap-etf.html" target="_blank">EMER overview</a>).
Opinion:  This is the first ETF to target emerging market mid-cap stocks, which tend to be more sensitive to internal country growth versus the export orientation of the large-cap firms.  I expect to be holding shares of EMER in the future. 
 
Market Vectors CEF Municipal Income ETF (<a class="ticker" href="/stock/xmpt#">XMPT</a>) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S-Network Municipal Bond Closed-End Fund Index, which is composed of shares of municipal closed-end funds listed in the United States.  The index assigns a greater weight to funds trading at a discount.  As a Fund- of- Funds (ETF of CEFs), XMPT will incur acquired fees of 1.03% but will cap its net expense ratio at 1.43%  (<a href="http://www.vaneck.com/funds/XMPT.aspx" target="_blank">XMPT overview</a>).
Opinion:  XMPT is the first ETF to offer municipal CEF exposure.  Based on figures of the underlying index, I estimate that XMPT will have a distribution yield of 5.2% with monthly distributions, a modified duration of 10.4 years, and leveraged exposure of 134%.  A similar product, the <a href="http://investwithanedge.com/pcef-closed-end-funds-inside-an-etf" target="_blank">PowerShares CEF Income Composite Portfolio</a> (<a class="ticker" href="/stock/pcef#">PCEF</a>), has a current distribution yield of 6.6% with an expense ratio of 1.62%.  However, it holds only taxable closed-end funds.  XMPT's focus on municipal income funds will produce a higher tax-equivalent yield for most investors.
 
MAXIS Nikkei 225 Index Fund (<a class="ticker" href="/stock/nky#">NKY</a>) (<a href="http://precidianfunds.com/2/nky225/" target="_blank">NKY overview</a>) seeks to provide investments results that correspond generally to the price and yield performance, before fees and expenses (0.50% expense ratio), of publicly traded securities in the Japanese market, as measured by the price-weighted Nikkei 225 Index.  The largest sectors within the Nikkei 225 include Industrials 24.9%, Technology 18.8%, Consumer Discretionary 18.7%, and Health Care 9.2%.
The sponsor and advisor, Percidian Funds, is a new entrant to the US ETF market.  However, the management team at <a href="http://www.precidianfunds.com/index.php/news/86-precidian-investments-name-change-press-release" target="_blank">Percidian, formerly Next Investments</a>, was involved in the development of SPDR Gold Shares (<a class="ticker" href="/stock/gld#">GLD</a>) and the CurrencyShares product line.  The “MAXIS” in the fund's name is a registered service mark of Mitsubishi UFJ Asset Management.
Opinion:  The <a href="http://investwithanedge.com/first-wave-of-etf-closures-for-2009" target="_blank">closure of Northern Trust's family of NETS ETFs</a> created a void of products focusing on the well-known home-grown indexes of foreign countries, and Percidian brought in Northern Trust as the sub-advisor to NKY.  The iShares MSCI Japan (<a class="ticker" href="/stock/ewj#">EWJ</a>) currently owns the Japan ETF space and has a 15-year head start on gathering assets.  NKY has a long way to go to catch up.
 
ProShares Hedge Replication ETF (HDG) (<a href="http://www.proshares.com/funds/hdg.html" target="_blank">HDG overview</a>) is the 122nd ETF from ProShares and seeks investment results, before fees and expenses (expense ratio 0.95%), that track the performance of the Merrill Lynch Factor Model — Exchange Series.  The index tries to match the risk and return characteristics of the hedge fund asset class by targeting a high correlation to HFRI Fund Weighted Composite Index (HFRI), an equally weighted composite of over 2,000 hedge funds.  Neither HDG nor the underlying index invests in hedge funds.  Instead, the index for the ETF attempts to mimic the characteristics of the HFRI using a systematic model to establish weighted long or short (sometimes long or flat) positions in six underlying factors on a monthly basis.  The six factors are the 1) S&amp;P 500 Total Return Index, 2) MSCI EAFE US Dollar Net Total Return Index, 3) MSCI Emerging Markets US Dollar Net Total Return Index, 4) Russell 2000 Total Return Index, 5) three-month U.S. Treasury bills, and 6) ProShares UltraShort Euro ETF.
Opinion:  <a href="http://investwithanedge.com/launch-of-mcro-etf" target="_blank">Index IQ blazed the trail for hedge fund replication products</a> in the ETF space in 2009 with the IQ Hedge Multi-Strategy Tracker ETF (<a class="ticker" href="/stock/qai#">QAI</a>) and IQ Hedge Macro Tracker ETF (<a class="ticker" href="/stock/mcro#">MCRO</a>).  The goal of equity-like returns with bond-like volatility is the “allure” of hedge funds, but that goal has escaped QAI and MCRO the past two years.  They have underperformed both stocks and bonds while having higher volatility than iShares Barclays Aggregate Bond (<a class="ticker" href="/stock/agg#">AGG</a>).  Even so, QAI has attracted nearly $135 million in assets, indicating investor demand and a potential payoff for the sponsor that eventually best delivers on the allure.
 
Schwab US Aggregate Bond ETF (SCHZ) (<a href="https://www.schwabetfs.com/summary.asp?symbol=SCHZ" target="_blank">SCHZ overview</a>) seeks investment results that track, as closely as possible, before fees and expenses, the total return of the Barclays Capital U.S. Aggregate Bond Index.  SCHZ becomes the fourteenth member of Schwab's broad-based ETF lineup.
Opinion:  SCHZ tracks the same index as the two category heavy weights – iShares Barclays Aggregate Bond (<a class="ticker" href="/stock/agg#">AGG</a>) with a 0.22% expense ratio and assets of nearly $12 billion, and Vanguard Total Bond ETF (<a class="ticker" href="/stock/bnd#">BND</a>) with a 0.11% expense ratio and assets of more than $10 billion.  Having the industry's lowest aggregate bond fund expense ratio at only 0.10%, <a href="http://investwithanedge.com/schwab-creates-watershed-event-with-commission-free-etfs" target="_blank">commission-free trading for clients of Schwab</a>, and a well-known underlying index, should guarantee success for SCHZ.
 
WisdomTree Global Real Return Fund (RRF) (<a href="http://www.wisdomtree.com/etfs/fund-details-alternative.asp?etfid=72" target="_blank">RRF overview</a>) seeks total returns of capital appreciation plus income that exceed the rate of inflation over long-term investment horizons.  RRF is actively managed using a structured investment approach that considers country and currency exposure, sector allocation, investment exposure and risk.  The fund incorporates both domestic and global inflation-linked debt securities as well as disciplined commodity strategies, thereby offering investors the potential for short- and long-term inflation protection, enhanced risk-adjusted performance, income, and diversification for traditional portfolios.  RFF will make quarterly dividend payments but expects the payment amounts to fluctuate.  Initial allocations include 67% Inflation Linked Bonds (22% US, 22% Developed Markets, and 22% Emerging Markets) and 33% Commodities (20% CTI Index, 10% CSCB Index, and 3% gold).
Opinion:  RRF appears to take a reasonable approach to providing a diversified inflation beating fund.  Its <a href="http://investwithanedge.com/two-inflation-hedge-etfs-launched-by-index-iq" target="_blank">primary competitor, IQ Real Return ETF</a> (<a class="ticker" href="/stock/cpi#">CPI</a>), is structured too conservatively to attract investor interest.
 
Disclosure covering writer, editor, and publisher:  Long GLD.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
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PCEF

VZZB

XMPT

Nine New ETPs for Week Ending 7/15/11

For the last few days we've been looking at some of the building blocks of what portfolio construction has been and asking whether or not individual investors need to make changes to how they do things. I also think there are practical applications, at least conversationally, for investment advisors as well.
In that light it might be worth putting forth a wacky-ish theory as a basis for making the conversation a little more interesting. Another motivation for this post is an article from Invest With An Edge that asks <a href="http://investwithanedge.com/is-modern-portfolio-theory-out-of-date">Is Modern Portfolio Out Of Date</a>. My general take on MPT is that the assumptions that it relies on work except for the times that they don't, if you take my meaning.
For the concept I will lay out I make a couple of assumptions that you are welcome to disagree with but you can't have a wacky theory without a couple of assumptions. The first assumption is that because of very low interest rates most of the bond market is unattractive and because of the extent to which the crisis is not over fundamentally the risk reward in the high yield market is not so hot. The next assumption is that many investors, including advisors, don't like to pick stocks preferring funds of some sort. Assumption number three is that the broadest of the broad indexes will not offer great results as they are heaviest in the fundamentally least attractive segments of the market.
I made a comment in passing that a tiny allocation to equities, as mentioned by Felix Salmon, is probably not the way to go but that someone ratcheting down to a 50% allocation to equities from 70% might be a reasonable reaction to the previous decade but still the bond market is not very attractive (you're buying high, prices may or may not go down but buying high is buying high).
<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_7ZckZ-8naz0/S_SBqPY5s5I/AAAAAAAADPE/rS339RBOeLs/s1600/qai.JPG"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 320px; height: 180px;" src="http://4.bp.blogspot.com/_7ZckZ-8naz0/S_SBqPY5s5I/AAAAAAAADPE/rS339RBOeLs/s320/qai.JPG" alt="" id="BLOGGER_PHOTO_ID_5473142009847460754" border="0" /></a>The chart compares the Index IQ Multi Strategy Tracker ETF (QAI) and the IndexIQ Macro Tracker (MCRO) against the iShares TIP ETF (TIP) and the S&amp;P 500. TIP is a client holding.
When QAI and MCRO came out I was very skeptical but save for the last month they have delivered as advertised, IMO. QAI appears to have rolled over very recently due to exposure in EFA and EEM while MCRO had 32% in emerging market ETFs as of 3/31/10. For the returns for QAI and MCRO you see on the chart you can add 80 or 90 basis points for dividends paid by the funds in December.
In addition to the 5-6% that TIP went up it paid a little over 3% in dividends in the trailing 12 months but that means nothing going forward.
With short term bond yields so low the results of QAI, MCRO and TIP offer real competition for bond exposure. Hopefully it is obvious that there are many other products out there that could fill the role. But so the first part of the wacky theory is putting half the portfolio in things like QAI, MCRO and TIP because so much of the bond market is priced so highly and the fundamentals for so many segments stink.
The second half of the wacky theory is to put the other half of the portfolio into countries that no one talks about or at least don't talk about very often. This could be via country ETFs or thematic ETFs. Research could include South America, Antipodes, much of Asia (not Japan), Scandinavia, Israel, maybe Egypt and Canada. In addition to the most of the large cap country funds, IndexIQ (I do not get paid by them and they do not advertise on my site) has a few small cap country funds with more on the way.
Regarding thematic funds, obviously you need to be on board with the theme but things like wind, smart grid, nuclear--whatever--there are plenty of choices and more on the way. With this sort of approach there would need to be great care taken to watch for sector imbalances and any other type of imbalance. A lopsided portfolio no matter what it owns will come home to roost at some point.
The overall wacky theory addresses what I believe is a lousy environment for bonds and the possibility that broad based indexing will continue to come up short for a while longer. You can decide, and comment, whether these things are addressed well or not or whether they even need addressing.
For the 1+1=11 Brigade this post was theoretical, I'm not doing this, I don't own QAI or MCRO. These posts are about extreme ideas as a means of exploring moderate portfolio tweaks. For example I've written a lot of posts about absolute return funds and strategies but we own one fund in this space with only a 2-3% target allocation. 
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