Highland Capital Launches 3 Hedge Fund Style ETFs

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Includes: ALFA, DRVN, GURU, HHDG, HHFR, MNA
by: Zacks Funds

Dallas-based Highland Capital Management is expanding its presence in the ETF world with a focus on alternative investing. Early this year, the issuer filed for 17 alternatives ETFs all targeting four broad hedge funds styles - equity hedge, event driven, macro and relative value. The successful debut of these funds will make Highland one of the largest managers of alternative ETFs in the market.

Out of these, Highland Capital recently rolled out a trio of products that aim at giving investors new options in the hedge fund space. The three funds - the Highland HFR Global ETF (NYSEARCA:HHFR), the Highland HFR Event-Driven Activist ETF (NYSEARCA:DRVN) and the Highland HFR Equity Hedge ETF (NYSEARCA:HHDG) - are designed in collaboration with HFR and are the first of their kind to replicate hedge fund positions in an ETF. The trio provides global hedge fund exposure by investing in equity and debt securities of the U.S. and international companies, charging investors 85 bps in annual fees.

The introduction of these ETFs quadrupled the size of Highland Capital's ETF lineup.

HHFR in Focus

This ETF seeks to tracks the HFRL Global Index, which uses all the four hedge fund strategies to select the stocks. These strategies may include event-driven, long/short equity, macro, relative-value and other strategies commonly used by hedge fund managers.

DRVN in Focus

This fund looks to target the stocks of event-driven strategies, which take advantage of transaction announcements and other specific one-time events. The strategy then utilizes an investment process that identifies equity opportunities in companies which are currently engaged in a corporate transaction, such as mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. The ETF seeks to track the HFRL Event-Driven Index.

HHDG in Focus

This fund follows the HFRL Equity Hedge Index, which measures the performance of stocks based only on equity hedge strategies that combine long holdings of equity securities with short sales of stock, stock indices or derivatives related to equity markets.

How Do They Fit in a Portfolio?

The new products appear interesting choices for investors seeking some smart stock-selection techniques to avoid risks in the market.

Hedge-fund replication ETFs have been gaining immense popularity in recent years as these seek to outperform the market over the long term. The funds try to either replicate the investing styles of renowned investors or mimic an index that aims to provide specific hedge fund strategies. This results in a solid and well-diversified portfolio having superior adjusted risk returns. After all, the hedge funds have proven their supremacy by making huge money in any market environment.

Competition

While there are a number of hedge-fund replication ETFs on the market that use a fund-of-fund approach, there are only a few that use a stock-selection methodology. The ultra-popular the Global X Guru Index ETF (NYSEARCA:GURU) uses a proprietary methodology to compile the best ideas from a select pool of hedge funds by looking at the 13F document on a quarterly basis. The ETF has AUM of $266 million and expense ratio of 0.75%.

The other popular name in this regard is the AlphaClone Alternative Alpha ETF (BATS:ALFA), which has garnered $161.6 million in its asset base while charging 95 bps in fees per year. It uses a proprietary ranking system, 'Clone Score', which ranks hedge funds and institutional investors based on the efficacy of replicating their publicity disclosed positions.

The IQ ARB Merger Arbitrage ETF (NYSEARCA:MNA) is an event-driven hedge fund that might give stiff competition to DRVN. This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer yet provides short exposure to global equities as a partial equity market hedge. The product has amassed $130 million in its asset base and charges 75 bps in annual fees.

Given that all these products have been able to build up decent assets, it might not be difficult for the Highland products to see solid inflows and garner investor interest given that the interest rate hike might lead to uncertainty and bouts of volatility.

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