Look what hit the FT Alphaville inbox on Monday evening.
It is a press release from the IQ Alpha Hedge strategy fund, which claims to be the first no-load, open-end mutual fund designed to “replicate broad-based hedge fund performance characteristics.” In english, it is a mutual fund, comprised entirely of ETFs, masquerading as a hedge fund.
And it is celebrating its one year anniversary:
NEW YORK, (July 13, 2009) - The IQ ALPHA Hedge Strategy Fund (IQHIX) . . . marked its one-year anniversary on June 30th, the fund’s sponsor, IndexIQ, announced today.
The IndexIQ fund uses a proprietary rules-based methodology to replicate the returns of six major hedge fund strategies: Equity Long/Short; Global Macro; Emerging Markets; Fixed Income Arbitrage; Equity Market Neutral; and Event Driven. Alpha is sought by optimizing the relative index weights among these six hedge fund strategies. The Fund seeks to achieve investment results that correspond to the total return of the IQ ALPHA Hedge Index. The objective of the Index is to provide superior returns with lower volatility relative to the Standard & Poor’s 500, and with a correlation similar to that between hedge funds generally and the S&P. For the trailing 12-month period, the fund was down -2.58 percent, compared to a loss of -26.21 percent for the S&P 500.
By comparison, the HFRI Fund Weighted Index returned -10.19 per cent in the 12-month period. So is IQ Alpha beating the real hedgies?
Not quite.
On a year-to-date basis the picture is very different. IQ Alpha fund increased 5.81 per cent versus an increase of 3.16 per cent for the S&P 500. But actual hedge funds (HFRI Fund Weighted Index) posted a YTD return of 9.41 per cent at the end of June, according to Hedge Fund Research. The Fund of Funds Composite Index, which we think IQ Alpha most resembles given it is basically a fund of ETFs, gained 5.24 per cent in the period — just marginally less than IQ Alpha.
That resemblance itself poses problems, however, since as with fund of hedge funds the IQ Alpha index will be double-dipping investors for performance fees. The returns it notes in the press release above are before IQ Alpha’s own management expenses but net of ETF ones.
As Marketfolly aptly put it about a similar IndexIQ product:
The vehicle itself (QAI) is an interesting idea as it could potentially give hedge fund strategy exposure to investors who typically do not have access to such alternatives due to regulations and restrictions. So, we definitely applaud the innovation. But, in its current incarnation and nomenclature, QAI has some problems. It is not an ETF, but rather an ETF of other ETFs (or, as we like to call it, an exchange traded fund of funds). And, instead of being charged only one expense ratio, you will passively be ‘double-dipped’ with fees of the underlying ETFs they invest in, in addition to the expense ratio QAI charges. While QAI’s current designation as a “Hedge Fund Multi-strategy ETF” may be politically correct, we think it should be designated a “Fund of funds ETF.”Related links:
Criticisms of QAI, the new hedge fund ETF - Marketfolly
IQ ALPHA Hedge Index - Index IQ
Hedge fund clones grow in appeal - FT
