Can Hedge Fund Strategies be Replicated in an ETF?
It would seem counter-intuitive to assume hedge fund strategies could be replicated by a long only ETF. In fact, it seems almost preposterous that a long only, more or less buy and hold ETF, could possibly replicate the returns of hedge fund strategies such as long/short and arbitrage. However, that is exactly what the IG Mult-Strategy Tracker (QAI) ETF seeks to do.
QAI replicates the tactics hedge funds are famous for, such as short selling and arbitrage, by investing in other ETFs. For example, to create a short position the long only ETF can by ProShares Ultra Short ETFs which ghave inverse exposure. The hedge fund replicating ETF apparently relies on a compex scoring system to guide its investments.
According to Index IQ's website "The IQ Hedge Multi-Strategy Tracker ETF seeks to track, before fees and expenses, the performance of the IQ Hedge Multi-Strategy Index. The Index attempts to replicate the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets."
Key advantages of the ETF versus a portfolio of hedge fund investments : no minimum investment, daily liquidity, relatively low .75% management fee (versus 2% and 20% for most hedge funds), no accrediting required.
Alas, the ETF has only been trading for a few days and it remains to be seen how well it can actually track billionaire managers and their funds employing some of the smartest people in the country. The IQ Mult-Strategy Index, upon which the ETF is based has outperformed the Credit Suisse Blue Chip Index and HFRX Global Hedge Fund Index over the last 3 months, 1 year, 3 year, and 5 year periods. This could be a good sign, or as is often the case with backtested strategies, it could severely underperform once it goes from hypothetical index to actual equity.