Tag Archives: QAI

Does Hedge Fund Replication Work?

Just days after the stock market hit its March 2009 bottom, IndexIQ, a tiny index provider, launched its first exchange-traded fund, the IQ Hedge Multi-Strategy Tracker ETF (QAI). As far as attracting investors, the timing proved inauspicious. Most investors were shellshocked after witnessing the stock market plummet more than 50 percent in 18 months. However, inside the ETF industry, the fund’s hedge fund replication strategy drew much interest. In April, the ETF won Most Innovative ETF and its eponymous index won Most Innovative Index at the 9th Annual Closed-End Funds & Global ETFs Forum, the first time a single firm won awards in both categories.

It’s no wonder. Hedge funds are sexy. These aggressively managed portfolios use sophisticated strategies to generate market-beating returns, otherwise known as alpha. Also, they’re very exclusive. Called “mutual funds for the super rich” by Investopedia, hedge fund investors need to be accredited. This means investors must not only be knowledgeable, but they must have a net worth greater than $1 million and make a certain amount of money. Unlike mutual funds, hedge funds aren’t regulated, so they have the flexibility to invest in many kinds of assets.

Hedge fund ETFs like QAI were supposed to solve all that. Democratize the space. Lower costs. Increase transparency.

It was “hedge funds for the rest of us.”

But do they deliver?

Now that the IQ Hedge Multi-Strategy Tracker and its brother, the IQ Hedge Macro Tracker ETF (MCRO), have passed their first birthdays, it’s possible to perform data comparisons to see if they actually deliver. Do these funds provide the pattern of returns that investors want when accessing the hedge fund space?

The first thing one needs to know is that, contrary to conventional wisdom, hedge fund ETFs aren’t charged with maximizing return on investment. They follow the strategy of the original hedge funds, reducing risk and minimizing losses by shorting and holding a combination of asset classes not correlated to the broad market. Of course, reducing risk means dampening potential profits, which means when the S&P 500 Index goes straight up on a bull rally, hedge fund ETFs will lag the market’s returns.

And that’s exactly what happened for the 12 months ending June 30: When the S&P 500 leapt 14.4 percent, the IQ Hedge Multi-Strategy Tracker inched up 2.2 percent and the IQ Hedge Macro Tracker gained 3.9 percent.

“Nothing is designed to shoot the lights out,” said Adam Patti, chief executive officer at IndexIQ. “I look at stress periods in the market as where hedge funds should be doing well.”

The hedge worked during the second quarter of 2010 when the S&P 500 tumbled 11.4 percent into a market correction. QAI slid 2.6 percent and MCRO lost just 2.1 percent. The ETFs also reduced volatility for the six months ended June 30. The S&P fell 6.7 percent during that period, while the QAI and MCRO posted negative returns of 2.5 percent and 2.3 percent, respectively.

“They are trying to produce a return pattern of the average hedge fund,” said Kevin Malone, president of Greenrock Research, a Chicago research firm. “The reason to consider this is to get a return pattern different from stocks and bonds; better than bonds but not as good as stocks.”

Originally published in ETF Report. For the full story click here.

Capital Link Gives Index IQ Top Awards

Index IQ won the top awards at Capital Link’s 9th Annual Closed-End Funds and Global ETFs Forum Wednesday in New York.

In the elite Metropolitan Club overlooking Central Park, about 900 people came to listen to industry insiders give their view of the industry today.

“Lack of clarity on what an ETF remains a big issue in the industry,” said Deborah Fuhr, BlackRock’s global head of ETF research and implementation strategy, who gave the conference’s State of the Industry address. She said calling all exchange-traded products ETFs creates confusion among investors and things need to be given specific names so that people know what they are buying. “There should be clarity. Classification is important for tax regulations, which can have an impact on the use of an ETF.”

Among the seven awards given out by Capital Link, Index IQ’s IQ Hedge Multi Strategy Tracker (QAI) won Most Innovative ETF in 2009. It’s tracking index, the firm’s IQ Hedge Multi Strategy Index, won Most Innovative Index. IShares took awards for Best Shareholder Relations and Best Investor Relations ETF Website. Michelle Fuller of State Street Global Advisors won the award for making the biggest contribution to the ETF sector in 2009. The award ceremony neglected to say exactly what her contribution was.

Morgan Stanley won the award for the Best Research Team for ETFs in 2009. Dominic Maister, the executive director of Morgan’s team, won the award for the analyst who made the best contribution to the ETF sector last year.

The Capital Link awards are chosen by a nominating committiee of 14 industry insiders and analysts.

ETF Tracks Two Hedge Fund Strategies

Unlike the mutual fund industry, where the line up of funds seem the same from fund house to fund house, in ETFland originality can make or break you. IndexIQ continues to build the niche of following hedge funds without actually owning hedge funds.

The Rye Brook, N.Y., company launched the IQ Hedge Macro Tracker ETF (MCRO) to track the index of the same name. The IQ Hedge Macro Index combines both Global Macro and Emerging Markets strategies, two strategies that historically have performed well after significant market dislocations. IndexIQ previously released the IQ Hedge Multi-Strategy Tracker ETF (QAI).

Global Macro hedge fund strategies look for investment opportunities around the globe where they can find market inefficiencies and dislocations amid a variety of asset classes including stocks, bonds, commodities, and currencies. Emerging Markets strategies attempt to identify investment opportunities in growing emerging market countries, including the BRIC nations of Brazil, Russia, India and China.

It looks like the fund seeks to get emerging market returns, a traditionally volatile market segment, with less volatility. So far in 2009, emerging markets equities have performed well.

The IQ Hedge Macro Strategy Tracker ETF doesn’t invest directly in hedge funds. Instead it uses data from hedge fund strategy returns. “It uses factor and quantitative analysis to replicate the returns and common risk factors of hedge fund investing strategies, using existing Exchange Traded Funds as the building blocks of the portfolio.”

Got that kids?

It doesn’t invest in hedge funds. It just tries to replicate their strategies by using existing ETFs. It’s a fund of funds. Here’s the portfolio on March 31, 2009. Scroll to the second page.

The typical hedge fund charges 2% of your assets and 20% of your profits. That 2% is still a nice chunk of change when your fund loses money. The MCRO ETF charges an expense ratio of 0.75%. Actual operating costs were 1.14%, so they’re cutting that to keep competitive with other ETFs.

IndexUniverse, which calls these ETFS “hedging strategies at bargain-basement prices” made a nice chart of the funds composition at the end of last month.

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.