Will Hedge Strategy ETFs Replace Hedge Funds?

Jun. 5.09 | About: IQ Hedge (QAI)

A blogger named Michael Johnston posed an interesting question in asking whether, after the closing of several prominent hedge funds, ETFs that try to replicate hedge fund strategies will replace hedge funds.

The first one to come to mind is the IndexIQ Multi Tracker (NYSEARCA:QAI). QAI listed in March with a very heavy allocation to fixed income ETFs (QAI replicates several hedge fund strategies using ETFs) so as stocks have gone up a lot QAI has gone up very slightly.

In addition to QAI, IndexIQ has filed for 15 other ETFs of ETFs that will more narrowly isolate specific hedge fund strategies.

In general terms the concept has merit. While I would want to give any sort of fund like this quite a few months to prove itself, it is reasonable to think that most of these funds can deliver some sort of low vol effect that does not correlate to the US equity market. Some will disappoint, though.

What is not a good bet is some sort of exchange traded, retail product going up 500% in year because it shorted the Latvian lat, the Estonian kroon and the Slovenian tolar as we will probably hear about some hedge fund somewhere doing six months from now.

Who knows how these things will be marketed, but I would bet that many people will assume they can get huge returns. The only way I can see that happening would be if equities in general had huge returns one year.

There will be a lot of funds in this space, but hopefully not unrealistic expectations.