Why Hedge Fund Strategy ETFs Are Catching On

Date: Wednesday, April 22, 2009
Author: Tom Lydon, ETF Trends.com

The first hedge fund linked index exchange traded fund (ETF) launched a few weeks back in the United States, and now Index IQ has created a plan greatly expand their hedge fund replication ETF family.

Index IQ’s first hedge fund ETF is setting the bar for the 15 new funds that will track indexes created by IndexIQ. The IQ Hedge Multi Strategy Tracker (QAI) debuted on the NYSE Arca electronic stock exchange last month, reports FIN Alternatives.

The ETF invests in other ETFs such as the iShares Lehman Aggregate Bond Fund (AGG) or the iShares MSCI Emerging Markets Index (EEM). Jeff Benjamin for Investment News notes that the ETF is being marketed as a low-cost retail-investor gateway to access the mysterious world of alternative investments. Benjamin says the fund passes muster on some big points: it offers the liquidity that characterizes ETFs, full transparency and low fees. The expense ratio is 1.09%, which is high for an ETF, but low when compared with other active strategies.

The planned ETFs are equal-weighted and asset-weighted versions of the Multi-Strategy Tracker ETF, as well as an inverse version. Strategies getting their own ETFs include absolute return, convertible arbitrage, dedicated short-bias, distressed, managed futures, market directional, merger arbitrage and relative value. Expense ratios are not yet determined.

These new ETFs are unique and give investors the kind of options they’ve been seeking, especially when they target markets that were previously unavailable to them. The big question is whether these ETFs will outperform the general markets and give protective hedging strategies to protect investors from downtrends.