First “Hedge Fund” ETF Launches in U.S.

The first ETF based on a hedge fund strategy launched in the U.S. today.

The IQ Hedge Multi-Strategy Tracker ETF (QAI) launched Wednesday on the NYSE Arca. It’s the first ETF out of IndexIQ, a provider of indexes for other ETF firms. The fund’s expense ratio will be 0.75%.

The IQ Hedge Multi-Strategy Index seeks to capture the risk-adjusted return characteristics of the collective hedge fund universe using multiple hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets. The ETF does not invest in hedge funds. Instead its portfolio is a fund of funds comprised of ETFs currently in the market.

This is not the first ETF based on a hedge fund strategy. Two weeks ago, Deutsche Bank launched the first hedge fund ETF in Germany. It does not trade in the U.S.

An ETF trying to replicate a hedge fund strategy offers many advantages over a true hedge fund. These include intra-day liquidity, portfolio transparency, lower fees than the typical hedge fund, the elimination of manager-specific risk, and real-time pricing.

IndexIQ sayts its unique “Rules-Based Alpha” philosophy combines the benefits of traditional indexing with the risk-adjusted return potential sought by the best active managers. Unlike traditional market indexes, which track the performance of a market or industry sector, the IndexIQ index tries to track the returns of distinct hedge fund investing styles.

Isn’t the appeal of a hedge fund 1) the manager’s skill at beating the market and 2) the ability to make any kind of transaction in the market, long and short. Not quite sure how this fund accomplishes that.

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