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Flood of ETFs promising hedge fund-style returns

Date: Wednesday, June 10, 2009
Author: Joseph A. Giannone, Reuters.com

Money managers are flooding the market with exchange-traded funds (ETF) and mutual funds designed to give even the smallest of investors access to hedge fund returns without all the usual restrictions or hefty fees.

IndexIQ Advisors, a start-up firm that seeks to replicate hedge fund performance, on Tuesday launched the index-based IQ Hedge Macro Strategy Tracker ETF (MCRO.P), about 75 percent focused on emerging markets and 25 percent on global trends. The offering joins the IQ Hedge Multi-Strategy Tracker ETF (QAI.P), which began trading in March and is up 17 percent.

Both ETFs charge a fee of 0.75 percent and invest in a range of ETFs, with the exact mix determined by computers looking to mimic hedge fund returns.

And there's a lot more to come. IndexIQ in April told the Securities and Exchange Commission that it plans to launch as many as 15 exchange-traded funds emphasizing different hedge fund strategies. The next offerings to come include a natural resources ETF, which will invest in stocks, and an inflation- hedged product buying a mix of commodity and equity ETFs.

"We intend to own the alternative investments space," said Tony Davidow, head of distribution at IndexIQ and former leader of Morgan Stanley's institutional consulting services. "We'd like to be the Vanguard of the hedge fund business."

The tiny firm, managing $100 million across a mutual fund, separate accounts and now two ETFs, is a long way away from catching up with the pioneer of the index mutual fund movement and its $1 trillion of assets.

And there is a growing number of competitors in this corner of the market.

Davidow says index funds offering hedge fund strategies can be beneficial to all investors, muting ups and downs and generating returns not tied to the overall market.

Since its launch nearly one year ago, the IQ Alpha Hedge Strategy IQHIX.O mutual fund has been flat, which is good compared with a 22 percent decline in comparable hedge funds and a 25 percent fall in the broader U.S. equity markets.

Disappointing hedge fund performance last year and redemption blocks have angered big investors and created a rare opening for new offerings. Firms such as IndexIQ, WisdomTree Investments and Grail Advisors intend to take advantage of the popularity of ETFs while offering strategies that used to be exclusive to the super rich.

San Francisco-based Grail Advisors LLC on Tuesday said it plans to launch four actively managed exchange-traded funds. RiverPark Advisors LLC will serve as lead sub-adviser for the RP Growth, RP Focused Large Cap Growth, RP Technology and RP Financial funds. Trading of these ETFs is expected to begin Sept. 1.

WisdomTree Investments, a money manager that has launched dozens of fundamental-weighted index ETFs, on Monday filed papers for three actively managed hedge fund-style ETFs: WisdomTree Real Return Fund, WisdomTree Managed Futures Fund and WisdomTree Long-Short Fund.

The lines dividing hedge funds and mutual funds have been fading over the past year.

AQR Capital Management LLC, a hedge fund firm with $20 billion under management, in January expanded into the mutual-fund business with the AQR Diversified Arbitrage Fund ADAIX.O. That was followed by its AQR Global Equity Fund AQGNX.O in February.

Highbridge Capital Management LLC, a unit of JPMorgan Chase & Co (JPM.N), has managed the JPMorgan Highbridge Statistical HSKAX.O Market Neutral mutual fund since 2005. (Editing by Steve Orlofsky)