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Hedgers aren’t hiding in the bushes, new ETF attests

Fund is being marketed as a low-cost gateway to alternative investing

By Jeff Benjamin

April 19, 2009 6:01 am ET

For more proof that the hedge fund mystique continues, or at least is expected to continue, look no further than the IQ Hedge Multi-Strategy Tracker ETF (QAI).

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Launched last month by IndexIQ, a Rye, N.Y., boutique asset management firm, the strategy is being marketed as a low-cost retail-investor gateway to the intriguing world of alternative investments.

A closer examination shows that this fund is actually less of a hedge fund than a layered package of exchange traded funds. The details are worth reviewing.

At first blush, however, one can’t help but notice the paradox of how the financial services industry continues to lean on the hedge fund nomenclature, even at times like these when the hedge fund industry is being strung up by a mob mentality that suggests such strategies could be at the root of all our economic woes.

Of course, we know that the truth about alternative strategies lies somewhere in the vastness between the extreme pros and cons.

“We’re coming to the market saying that hedge funds should be for everyone,” said Tony Davidow, IndexIQ’s executive vice president and head of distribution.

Such arguments are not uncommon whenever there’s a product to be pitched. But the question that always remains is whether the product is will provide the retail masses with any kind of hedge fund exposure — or anything else that retail investors really need.

MIXED RESULTS

Hedge funds, at least by the most basic definition, are supposed to hedge risk and produce absolute returns, or alpha.

In practice, the results have been mixed.

Through the first three months of this year, hedge funds, as measured by the Hennessee Hedge Fund Index, gained 1.1%.

By comparison, the Standard & Poor’s 500 stock index declined by 11.7% over the same period.

For the month of March, however, when the S&P 500 enjoyed an 8.5% rally, the hedge fund index gained just 1.4%.

The reason hedge funds did not participate in the March rally, according to Charles Gradante, co-founder of New York-based Hennessee Group LLC, boiled down to the illogical nature of the rally.

In essence, hedge funds were hampered last month because their fundamental analysis led to short sales in the financial, consumer discretionary and materials sectors — the very sectors that led the rally.

Nobody’s perfect, which is what investors and their advisers should understand before jumping headlong into the latest twist on hedge fund exposure.

Now, back to that newfangled IQ Hedge Multi-Strategy Tracker ETF.

Although its name doesn’t exactly roll trippingly off the tongue, the fund does pass muster on a few important measures.

It offers the constant liquidity that characterizes ETFs, full portfolio transparency and low fees.

The total expense ratio of the fund, including the fees charged by the underlying portfolio of ETFs, is 1.09 — high for an ETF, but low compared with most other active strategies.

A new Investment Insights column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at jbenjamin@investmentnews.com.

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