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Are Hedge Fund ETFs Working?

Posted in Mutual/Hedge Funds

Are hedge fund-oriented strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider six ETFs, all currently available (in order of decreasing assets):

  • IQ Hedge Multi-Strategy Tracker (QAI) - seeks to track, before fees and expenses, risk-adjusted returns of a collection of long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets hedge funds.
  • JPMorgan Diversified Alternatives (JPHF) - aims to provide direct, diversified exposure to hedge fund strategies via a bottom-up approach across equity long/short, event-driven and global macro strategies.
  • ProShares Hedge Replication (HDG) - seeks to track, before fees and expenses, an equally weighted composite of over 2000 hedge funds.
  • AlphaClone Alternative Alpha (ALFA) - seeks to track price and yield, before fees and expenses, of U.S.-traded equity securities to which hedge funds and institutional investors have disclosed significant exposures.
  • IQ Hedge Market Neutral Tracker (QMN) - seeks to track, before fees and expenses, risk-adjusted returns of market neutral hedge funds.
  • ProShares Morningstar Alternatives Solution (ALTS) - seeks to track, before fees and expenses, performance of a diversified set of alternative ETFs.

We consider both daily and monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We use two benchmarks, SPDR S&P 500 (SPY) and the Eurekahedge Hedge Fund Index (HFI). Using daily and monthly returns for the six hedge fund ETFs and SPY as available through September 2018 and monthly returns for HFI through August 2018, we find that:

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