ETF Spotlight: ProShares Hedge Fund Replication

October 31st at 8:00am by Tom Lydon

ETF Spotlight on ProShares Hedge Replication ETF (NYSEArca: HDG), part of an ongoing series.

Assets: $21.6 million.

Objective: The ProShares Hedge Replication ETF tries to reflect the performance of the Merrill Lynch Factor Model, which mimics the risk and return characteristics of the HFRI Fund Weighted Composite Index.

The hedge fund benchmark’s performance is determined by taking long- or short-positions in six component factors.

Holdings: As of Oct. 3, the index held exposure to the 6 components: S&P 500 Total Return Index 4.8%, MSCI EAFE US Dollar Net Total Return Index 15.0%, MSCI Emerging Markets US Dollar Net Total Return Index 10.5%, Russell 2000 Total Return Index 4.2%, three-month U.S. Treasury bills 62.7% and the ProShares UltraShort Euro ETF (NYSEArca: EUO) 2.9%.

What You Should Know:

  • ProShares sponsors the fund.
  • HDG has a 0.95% expense ratio.
  • Regional stock allocations include: U.K. 30.0%, Europe 40.4%, Africa/Middle East 2.0%, Japan 19.7% and Australasia 8.0%.
  • The fund is down 0.2% over the past month, up 1.7% over the last three months and up 1.3% year-to-date.
  • The ETF is 0.6% above its 200-day exponential moving average.
  • The strategy stands on substantial research showing that many hedge funds actually provide a lot of exposure to common risk factors (“beta”), like U.S. large-cap stocks or currencies, rather than pure skill (“alpha”), according to Morningstar analyst Samuel Lee.
  • HDG acts like a low volatile investment portfolio.
  • “Don’t expect this fund to hit home runs (or lose as much as the market),” Lee added. “The model has in the past kept most of its exposure in cash to copy the HFRI index’s low volatility, and it will likely continue to do so.”
  • There are also other hedge-fund replication ETFs available, including IQ Hedge Multi-Strategy Tracker (NYSEArca: QAI), IQ Hedge Macro Tracker ETF (NYSEArca: MCRO) and Credit Suisse Long/Short Liquid Index (NYSEArca: CSLS), among others.

The Latest News:

  • ProShares’ Head of Investment Strategy, Joanne Hill, recently told ETF Trends that alternative investments, like HDG, make sense for investors who are sensitive to risk-adjusted returns or those who want absolute return strategies without a benchmark.
  • According to Deutsche Bank research, 57% of total assets under management in hedge funds comes from institutional investors, reports Anna Fedorova for Investment Europe.
  • “There is tremendous interest in replication because of cost reduction and as a way to separate hedge fund alpha from hedge fund beta,” Daniel Celeghin, partner, Casey, Quirk & Associates LLC, Darien, Conn., said in a Pensions & Investments article.

ProShares Hedge Replication ETF

For past stories in this series, visit our ETF Spotlight category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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