New hedge fund look-alike ETFs go beyond existing strategy-based ones by seeking to replicate holdings. But whether they really do that is open to debate.
What if you could emulate the actions of the most successful hedge fund managers for a fraction of what they cost? Two ETFs that debuted this summer are trying to do that by using public filings to replicate their portfolios. And a third, which launched early this month, promises to add another hedge fund dimension to ETF copycats by adopting what its sponsor calls the only true market-neutral strategy in the lot.
Researchers have been trying to emulate hedge fund strategies since the 1990s. But the first mutual fund to do so, Index IQ’s Alpha Hedge Strategy Fund (IQHIX), didn’t launch until June of 2008. It has since outperformed the S&P 500, which is in red so far this year and for the past 12 months and 3 years, whereas IQHIX is up 4.8 percent, 6.9 percent and 2.6 percent, respectively, for the same periods.
There soon followed two Index IQ ETFs, Hedge Multi-Strategy Tracker ETF (QAI) and Hedge Macro Tracker ETF (MCRO), based on “factor replication.” Factor replication uses statistical modeling of funds to analyze the managers’ investment patterns within six overall styles and recreate their risk-adjusted performance based on those factors for purposes of creating a fund of funds. The process originated with Index IQ’s chief strategist, Robert Whitelaw, who chairs the finance department at New York University’s Stern School of Business.
But these ETFs are trailing the hedge fund universe. As of early October, QAI and MCRO had respective 3-year annualized average returns of 2.9 percent and 3.2 percent, compared with 3.9 percent for the HFRI Fund Weighted Composite Index.
In contrast, two of the newest ETFs seek to replicate hedge funds’ strategies base on their actual positions. New York-based Global X Funds’ Top Guru Holdings Index ETF (GURU) and San Francisco-based AlphaClone’s Alternative Alpha ETF (ALFA) invest in indexes they create based on the holdings of hedge fund managers as reported in their 13F SEC filings. ALFA, which started trading on May 31, 2012, has a 3-month average annualized return of 9.23 percent, and GURU, which initiated trading on June 5, 2012, has a 3-month return of 9. 60 percent, compared with the HFRI index’s 3-month return of 2.6 percent for roughly the same period....MORE