Unlimited’s Elliott on Differentiated Hedge Fund ETFs

“The vast majority of investors are paying fees that are way too high, whether it’s in mutual funds, whether it’s in two and 20 products,” noted Elliott. These issues are ones that ETFs and the ETF industry try to solve for with the cost-saving and tax-efficient structure of the ETF. As issuers continue iterating and innovating, a wider array of strategies become available to investors via the ETF structure.

Hedge funds are one of the biggest areas of opportunity for cost savings and the democratization of strategies that ETFs can provide. Indeed, a number of hedge fund replication strategies now exist on the market, including four from Unlimited. It’s a trend that follows shifts in how investors approach their core portfolios.

“The industry, particularly the RIA industry, and even large family offices and larger strategic asset allocators are moving from a world of 60/40 to a world of 50/30/20, where that 20 is an alternatives allocation,” Elliott explained. However, most alternatives strategies historically offered either carried high fees or lacked liquidity.

ETFs such as the ones offered by Unlimited seek to solve for these issues. The firm provides four ETFs with lower fees that add diversification by replicating hedge fund sector aggregate positions. However, Unlimited seeks to also solve for muted total returns that many hedge funds generate. This is largely due to the influence of institutional investor clients that seek to minimize risk. As such, hedge fund strategies often offer bondlike risk adjusted return profiles. Combining this more-cautious approach with high fees (that can top out around 400 bps annually) erodes total returns.

“Instead of targeting bondlike risk, we’re targeting equity-indexlike risk, so we’re basically doubling the target return,” said Elliott of the firm’s 2x approach to investing. Additionally, the lower fees of the ETFs compared to hedge fund fees help retain more of the total return alpha potential of the strategies. “That combination is really significant because it transforms what looks on the surface like not great strategies from an investor’s perspective to something much, much more compelling for investors to include in their portfolios.”

Hedge fund strategies offer diversification through their ability to go long and short on asset classes. While most portfolios carry long-only positions, these strategies offer the chance to benefit when asset classes decline as well as when they generate strong performance. The ability to short assets make them notable defensive complements to existing allocations.

The ETF suite from Unlimited eliminates single-manager hedge fund risk through its “manager-diversified approach” that Elliott dubs “alpha indexing.” It compounds these diversification benefits with its 2x approach to hedge fund replication. “We basically cut the amount of capital you have to allocate to the strategy in half to get the same economic exposure,” he explained.

Unlimited offers a suite of actively managed hedge fund replication ETFs, which includes the broader Unlimited HFND Multi-Strategy Return Tracker ETF (HFND B-). The fund seeks to provide twice the returns of the hedge fund industry by replicating 2x returns of the major sectors. Strategies covered are global macro, long/short equity, emerging markets, managed futures, and more.

The firm also offers three targeted ETFs that pull out a singular hedge fund sector and seek to replicate returns. They consist of the Unlimited HFGM Global Macro ETF (HFGM ) and the recently launched Unlimited HFMF Managed Futures ETF (HFMF ) and the Unlimited HFEQ Equity Long/Short ETF (HFEQ ).

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