Despite the numerous drawbacks, including high fees and tepid performances that do not justify those fees, hedge funds typically conjure up glamorous images among investors.
Fortunately, exchange traded funds issuers have made the hedge fund space infinitely more approachable and far more cost-effective to a broad swath of investors. One of those ETFs is the ProShares Hedge Replication ETF (NYSEArca: HDG), which has been on the market for nearly four years.
HDG “seeks to provide the risk and return characteristics of the hedge fund asset class by targeting a high correlation to HFRI Fund Weighted Composite Index (HFRI). The HFRI is designed to reflect hedge fund industry performance through an equally weighted composite of over 2,000 constituent funds,” according to ProShares.
The hedge fund benchmark’s performance is determined by taking long- or short-positions in six component factors. Those factors currently include Treasury bills, the MSCI EAFE Index, the S&P 500, the Russell 2000 and the MSCI Emerging Markets Index as well as the ProShares UltraShort Euro (NYSEArca: EUO). [An Interesting Hedge Fund ETF]
As a hedge fund replication ETF, HDG qualifies as an “alternative” ETF, which is notable because alternatives are one of the fastest-growing investment asset classes. The alts space is growing. McKinsey calculates that alternatives make up 12% of the global industry assets and produced about a third of revenues in 2013. The firm projects alts will make up 15% of the industry and produce 40% of revenues by 2020.
ProShares offers other alternative ETFs, including the ProShares RAFI Long/Short ETF (NYSEArca: RALS) and the ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS). ALTS employs a range of alternative strategies to enhance risk-adjusted returns when added to a traditional stock and bond portfolio. [Alternative ETFs Gain Fans]