QAI NYLI Hedge Multi Strategy Tracker ETF

With markets clearly entering a ‘muddle through’ phase in which low growth and uncertainty are the norm, many investors are reevaluating some of their portfolio choices. This is especially true as a variety of U.S.-centric firms warn or miss on Q3 earnings, suggesting that America can no longer be counted on as a bastion of growth and stability and that some choppiness may be on the way for domestic investors.

Given this backdrop, putting some capital in lower correlated assets could potentially be a good idea as it could help to have some of the portfolio moving independently of broad markets. This could be very important if the glow from more QE wears off and if both emerging markets and domestic earnings seem poised to signal lower stock prices in the near term.

In this environment, it could be a good idea to consider some of the ‘hedge fund ETFs’ that are currently on the market. These products aren’t aiming for outsized returns but instead are looking to give investors positive returns no matter the broader market conditions (read The Truth about Low Volume ETFs).

While this may fly in the face of what some investors think of when they hear the words ‘hedge fund’, this approach actually goes back to what hedge funds were initially designed to do for investors. Furthermore, these ETF products all charge a whole lot less than what investors have to pay in the ‘true’ hedge fund space, suggesting that they can be a low cost option for uncorrelated returns as well.

For these reasons, the following three hedge fund ETFs could make for interesting additions at this time. Yet while all three utilize hedge fund strategies, they go about this process in very different ways meaning that pretty much every investor should be able to find a good choice that matches their style and needs in this intriguing space:  

IQ Hedge Multi-Strategy Tracker ETF (QAI)

This ETF is one of the more popular ones in the hedge fund space, seeking to incorporate a variety of strategies into its portfolio. These include; long/short equity, global market, market neutral, event-driven, fixed income arbitrage and emerging markets, just to name a handful.

The product is a bit expensive compared to passive ETFs, as total fees come in just over 1.0%. However, the product has a beta under 0.30 when compared to the S&P 500, suggesting that it will be a source of uncorrelated returns in many market conditions (also see Three Low Beta ETFs for the Uncertain Market).

At time of writing, the portfolio consisted of a variety of ETFs including a number of fixed income funds. These include heavy weights in products like LQD, BND, and AGG, giving the fund a focus on Treasury and corporate securities that are of high quality levels.

ProShares Hedge Replication ETF (HDG)

Although ProShares is well known for its geared ETFs that utilize leverage, it has a few funds that do not employ this technique including HDG. This product tracks the performance of the Merrill Lynch Factor Model- Exchange Series which looks to provide the risk and return characteristics of the hedge fund assets class by targeting a high correlation to the HFRI Fund Weighted Composite Index (read Three Defensive ETFs for a Bear Market).

This produces a fund that charges 95 basis points a year in fees while its volume is also quite light suggesting wide bid ask spreads. Still, the fund does a decent job of providing low levels of correlation with the S&P 500, while its standard deviation has been roughly half of the popular S&P 500 benchmark.

This is accomplished by using a variety of techniques including individual stocks but also long and short exposure to a variety of benchmarks including T-bills, MSCI Emerging Markets index, MSCI EAFE, the S&P 500 and the Russell 2000.

At time of writing, the latest fact sheet suggested that the fund was heavy in short-term Treasury securities and to a lesser extent, the MSCI EAFE index. Short exposure was concentrated in the S&P 500, suggesting that managers believed that turbulence could be coming for the American market.

IQ Hedge Macro Tracker ETF (MCRO)

Another choice from IndexIQ comes to us in the form of MCRO, a fund that looks to follow hedge fund strategies with a macroeconomic approach. This is done by following the IQ Hedge Macro Index which looks to match the characteristics of hedge funds utilizing either a macro or an emerging market focus.

This results in a fund that is slightly more expensive than the others on the list, coming in at 1.09%. Meanwhile, volume is again light, but the beta against broad world markets comes in at just 0.37 so it certainly has the ability to offer up uncorrelated returns in ETF form (read Does Your Portfolio Need a Hedge Fund ETF?).

Like its Index IQ counterpart, this fund is also heavily focused on bond ETFs for its exposure, as over 66% of the fund is in fixed income securities. This includes a heavy weighting in LQD, as well as decent allocations to BSV and SHY as well. Meanwhile from an equity perspective, VWO and EEM are the biggest holdings, while two currency products—DBV and FXY also find their way into the top holdings list.

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PRO-HEDGE REPL (HDG): ETF Research Reports
 
IQ-HEDGE MCR TR (MCRO): ETF Research Reports
 
IQ-HEDGE MUL-ST (QAI): ETF Research Reports
 
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