With an astounding rate of hedge fund closures coinciding with the introduction of hedge fund ETFs to the market, I wrote last week that we may see a gradual changing of the guard in the industry. I might have been wrong. It might not be so gradual. Over the last week, several new niche hedge fund ETFs have popped up, with more ETF sponsors getting into the game and jostling for investor dollars.
- WisdomTree Real Return Fund
- WidsomTree Managed Futures Fund
- WisdomTree Long-Short Fund
WisdomTree will become the second major sponsor to launch an ETF that seeks to replicate hedge fund returns. Earlier this year, IndexIQ launched the first ever hedge fund ETF, IQ Hedge Multi-Strategy Tracker ETF (QAI). QAI seeks to replicate the return of the IQ Hedge Multi-Strategy Index, which uses various hedge fund strategies, including long/short equity, global macro, market neutral, event-driven, and fixed income arbitrage.
Since its March launch, QAI has attracted more than $20 million of investor funds. Encouraged by this success, IndexIQ yesterday listed its second hedge fund ETF on the NYSE Arca Exchange. The IQ Hedge Macro Tracker ETF (MCRO) seeks to replicate the performance of an index tracking both global macro and emerging markets strategies. Commenting on the launch of the new fund, Anthony Davidow, head of distribution at IndexIQ, noted “MCRO offers access to two strategies that historically have performed well after significant market dislocations.”
Opening the Floodgates?
Davidow indicated that IndexIQ has received a tremendous amount of interest in individual hedge fund strategy ETFs since the launch of QAI, perhaps spurred by investors looking for alternative investments that are more cost efficient and transparent than traditional hedge funds. The potential for the hedge fund ETF industry is enormous. While QAI implements a multi-strategy objective, utilizing a variety of traditional hedge fund tactics, the most recent hedge fund ETFs are strategy specific (e.g., long/short, macro, etc.). With numerous strategies to choose from, we could see dozens of new ETFs before every corner of the market is covered.
Earlier this year, IndexIQ filed with the SEC to launch 15 additional single-strategy funds (and MCRO wasn’t even included in this list). If hedge fund ETFs continue to attract investment funds, I wouldn’t be surprised if we see IndexIQ begin to roll out more of these funds. And I also wouldn’t expect other sponsors to sit back and let WisdomTree and IndexIQ corner the market. So enjoy the exclusivity while it lasts – the hedge fund ETF waters may get very crowded very quickly.
Here Come the Skeptics
Skeptics will no doubt argue that ETFs will ultimately be unable to implement the complex strategies used by hedge funds to generate excess returns. In fact, the reliability of an index that purports to track hedge fund returns in the first place has been widely-criticized. And these skeptics may very well be right. But right now it’s far too early to evaluate the performance of the “first generation” of hedge fund ETFs relative to meaningful benchmarks. And while these funds may fall short of traditional hedge funds in some respects, they offer numerous material advantages (costs, transparency, liquidity) that may help tip the scales in their favor. Traditional hedge funds will always have their place among the super rich, but they may find they will have to share with the ETF industry.