By Murray Coleman, Barron’s,
Hedge funds typically require $1 million in investable assets just to qualify for consideration. Then they take 2% of your assets and 20% of your profits.
But exchange-traded funds are moving into the field, promising competitive returns without charging an arm and a leg.
The ProShares Hedge Replication ETF (HDG) launched today, charging an annual expense ratio of 0.95% and tracking a Merrill Lynch index covering a broad universe of more than 2,000 different types of hedgies.
The elder statesman is the IQ Hedge Multi-Strategy Tracker ETF (QAI). Launched a little more than two years ago, it’s managed to attract around $137 million in assets despite unfavorable start-up conditions.
Like HDG, it tracks a broad hedge-fund index reflecting the aggregate returns of different types of hedging strategies. It’s analogous to a “total-market” mutual fund. The QAI fund has an expense ratio of 0.75%, though it does get charged for the ETFs it buys, so the total is more like 1.13%, according to Morningstar estimates.
QAI made its debut just as the stock market was rebounding from the financial crisis and riskier plays were skyrocketing in value. The overall stock market jumped 15% in each of the fund’s first two quarters, not exactly ideal for a fund designed to hedge its bets using short selling and fixed-income securities.
But QAI began to hit its stride in the second quarter of last year. While the Standard & Poor’s 500 fell more than 11%, the ETF managed to lose less than 3%.
The new ProShares ETF could also be entering the market under less-than optimal conditions. A broad benchmark compiled by HedgeFund.Net reported earlier this week a 1% fall in June.
The extreme volatility in stocks and commodities so far this year has been difficult for many of the industry’s biggest names.
John Paulson’s flagship Advantage Fund was down close to 15% at mid-year, according to Reuters. Meanwhile, David Einhorn’s Greenlight Capital was reportedly off by 5% heading into the second-half of 2011.
Tags: ETF strategies, financial products, HDG, Hedge Fund strategies, hedge funds, innovation, QAI, Volatility