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Hedge funds are private investment funds that invest in a range of assets with a variety of investment strategies. Their assets can be non-traditional: Commodities, convertables, timbers, private equity or private RETIs, to name just a few. Their strategies range from traditional long-only strategies to hedging strategies that are intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings. Hedge funds are favorite investment vehicles for high net-worth individuals and institutions.

Hedge fund-style ETFs have been introduced to markets recently. These ETFs offer a number of advantages over traditional hedge funds. These include enhanced transparency, liquidity (no lock-up period) and significantly lower fees (no performance-based fee, for example). In light of recent market volatilities, such funds with downside protection or less correlation with traditional asset classes can be of interest to investors in their portfolio building. In fact, in Europe, hedge funds are often considered to be a separate asset class. This might or might not be appropriate, but it does tell the importance of hedge funds in asset allocation.

Please find below the table of hedge fund ETFs.

Description

Symbol

1 Yr

3 Yr

5 Yr

Avg. Volume (K)

1 Yr Sharpe

IQ Hedge Multi-Strategy

QAI

5.96%

NA

NA

48

126.17%

ProShares Credit Suisse 130/30

CSM

18.9%

NA

NA

22

117.14%

PowerShares S&P 500 BuyWrite

PBP

3.01%

-4.99%

NA

34

31.44%

Credit Suisse Merger Arbitrage

CSMA

NA

NA

NA

24

NA

Mars Hill Global Relative Value

GRV

NA

NA

NA

13

NA

In terms of return of one year, CSM is a best performer with an outperforming return of 18.9% in a year. Volumes are low but are justifiable as this ETF’s instruments are new. Here are some detailed analyses.

QAI is the most popular in the category. It implements perhaps the most broad-based strategy. QAI attempts to replicate the risk-adjusted return characteristics of hedge funds using various investment strategies, including long/short equity, global macro, market neutral, and fixed income arbitrage. In short, it is a multi-strategy hedge fund.

CSM tracks the index that is designed to replicate an investment strategy that establishes either long or short positions in certain of the 500 largest U.S. market cap equities (the "universe"). Short positions will approximate 30% of index portfolio value. Short sale proceeds are used to purchase 30% more in long positions using leverage. There is no guarantee index methodology will result in returns exceeding the index universe returns. It is not possible to invest directly in an index. This fund provides a way to boost performance using 'free' 30% capital for a long/short portion (with net zero exposure).

Other major advantages of hedge fund ETFs are:

  • The fees are very low as compared to the original hedge fund.
  • Using quantitative strategies have advantages over using human hedge fund managers, including security, bad human emotional decision, etc.
  • Anyone can invest in these ETFs, compared with high minimum thresholds imposed by many hedge funds.
  • Liquidity: You can trade anytime in and out of a fund instead of some mimimum lock-up periods (which sometimes can be as long as five years).
  • Low ETF commission fees these days.
  • Total transparency (hedge fund ETF) vs. the opacity of a hedge fund.
  • Strong regulatory oversight vs. little government regulations over hedge funds.

Though it is still too early to tell how these hedge fund ETFs perform and much needs to be done to find out how these ETFs fit into one's portfolio in terms of asset allocation, we believe it is worthwhile to monitor and study these funds.

Source: 5 Hedge Fund ETFs to Watch