Questioning how much more equities can rise before a significant correction, some investors are turning to alternative exchange traded fund strategies in an attempt to manage volatility.
So-called alternative or liquid alt funds that track long/short and market-neutral strategies help investors diversify portfolios and dampen volatility, reports Eric Balchunas for Bloomberg.
According to Morningstar data, alternative ETFs have been steadily attracting inflows, and now hold about $1.4 billion in assets, about double in size year-over-year.
Investors who are use to growth investments that generate outsized returns will not be impressed by these types of offerings. Instead, hedge-fund-like strategies are intended to diversify, or like the the moniker suggests, hedge stock and bond exposure, providing returns that don’t mirror the performance of traditional equity and fixed-income assets.
The IQ Hedge Multi-Strategy ETF (NYSEArca: QAI), with $770.1 million in assets, is the largest hedge fund strategy ETF. The ETF tries to reflect the risk-adjusted return characteristics of hedge funds through various hedge fund investment styles, such as long/short equity, global macro, market neutral, event driven, fixed-income arbitrage and emerging markets. The fund has a 0.94% expense ratio. QAI is up 2.4% year-to-date and generated an average annualized return of 3.7% over the past five-years. On a risk-adjusted return basis, QAI is up 0.41%, compared to the S&P 500’s 0.36%, adjusting for volatility.
The WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI), which has $156 million in assets, tries to achieve a positive total return in either rising or falling markets that are uncorrelated to broad market equity and fixed-income returns. The fund utilizes a combination of long and short positions in U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities. The ETF has a 0.95% expense ratio. WDTI is down 1.1% year-to-date. However, the fund has shown no correlation to the S&P 500, with about a third of the volatility.
Looking at the long/short space, the ProShares RAFI Long/Short ETF (NYSEArca: RALS) identifies opportunities that are implemented through both long and short securities positions. RALS seeks sector neutrality during its annual reconstitution. The ETF has a 0.95% expense ratio. The fund is up 0.8% year-to-date. [ETF Spotlight: Long/Short, Alternative Investment]
Additionally, the IQ Hedge Market Neutral Tracker ETF (NYSEArca: QMN) holds both long and short positions in asset classes and minimizes exposure to systemic risk, which is designed to give consistent returns in any market with low volatility. QMN has a 0.91% expense ratio. The fund is up 1.8% year-to-date.
For more information on hedge fund strategies, visit our hedge fund category.