Hedge Fund ETF

Posted on 29. Mar, 2009 by wiserwealth

Index IQ came out with their first Hedge Fund ETF last week.  A lot of press has been surrounding this ETF in the industry.  The ETF, the IQ Hedge Fund Multi-Strategy Tracker ETF, ticker symbol QAI, and has an expense ratio of .75%.  Below is the fund’s strategy.

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.

Why this is important?

This hedge fund ETF is a game changer because unlike other ETFs that merely track completely passive indexes or use a very simple systematic approach to choosing index constitutes, this ETF, through its index, is a hedge fund, using the strategies of hedge funds that have been around for some time.  Technically, the ETF replicates hedge fund strategies.  The hedge fund index does not track hedge fund performance (this would be difficult because of liquidity issues) but it replicates performance through replicating strategies.

Now, through this ETF, all investors can gain the benefit of hedge fund strategies.

Hedge Fund ETF Strategies

 Using the hedge fund strategies already mentioned like Long/Short and event driven, QAI, uses ETFs as its investment vehicle to implement these strategies.  QAI is a Hedge Fund of ETFs.

Costs

QAI having an expense ratio of .75% seems high compared to other passively managed ETFs.  However, .75% is a low cost for any mutual fund that actively manages any asset class.  Compared to other hedge funds, .75% seems like nothing.  The traditional hedge fund fee structure 2 and 20 means that the hedge fund charges 2% of all assets and 20% of all profits.  That in itself makes beating benchmarks a high hurdle.