Exchange traded funds that track liquid alternatives or replicate hedge fund strategies are beginning to outperform traditional hedge funds that they were mimicking.
Goldman Sachs looked at 337 “hedge fund-like” funds from Morningstar’s universe of 677 liquid alternative funds and found that hedge fund investing categories like equity long/short, event driven, relative value, macro and multistrategy often did better than the hedge fund indexes, reports Matt Turner for Business Insider.
“All five LAI Peer Groups outperformed or performed similarly to the related hedge fund indices last year,” Goldman said in a note.
The liquid alternative investments, though, still underperformed the traditional assets last year, along with most hedge funds.
“While absolute performance may have been underwhelming, the following analysis demonstrates that liquid alternatives performed in-line with their private placement or hedge fund counterparts,” Goldman added.
Nevertheless, liquid alternative funds provided a much cheaper way to access the same kind of hedge fund-esque exposure – hedge funds may include a normal management fee of 1% to 2% on top of a performance fee of as much as 20% of annual gains.
Investors can also tap into these alternative strategies through specialized ETFs. For instance, the PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT), ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) and IQ Hedge Multi-Strategy ETF (NYSEArca: QAI) provide a multi-strategy approach to a number of hedge fund strategies. Specifically, ALTS employs long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread investments.
The actively managed LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. QAI provides a diversified mix of alternative strategies, including multiple hedge fund investment styles, such as long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. Year-to-date, LALT was up 1.3%, ALTS dipped 1.2% and QAI was 0.4% higher.
[related_stories]Investors focus on specific strategies through targeted alternative ETFs. For instance, the First Trust Long/Short Equity ETF (NYSEArca: FTLS) and ProShares RAFI Long/Short ETF (NYSEArca: RALS) are two long-short strategies that take both long positions in U.S. equities and pare bets with short positions. FTLS was down 3.1% and RALS was 0.1% higher so far this year.
To capture the merger-arbitrage strategy, the Index IQ Merger Arbitrage ETF (NYSEArca: MNA), Credit Suisse Merger Arbitrage Index ETN (NYSEArca: CSMA) and ProShares Merger Arbitrage ETF (NYSEArca: MRGR) provide investors with a diversified approach to a group of takeover targets. The ETFs employ a type of alternative, “directional hedge fund strategy” called merger arbitrage. Specifically, the funds capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price. MNA rose 2.6%, CSMA added 0.1% and MRGR returned 1.9% year-to-date.
Additionally, the IQ Leaders GTAA Tracker ETF (NYSEArca: QGTA) and the AdvisorShares Morgan Creek Global Tactical ETF (NYSEArca: GTAA) both follow tactical asset allocation or event driven strategies that adapt to changes in the market environment. GTAA takes a discretionary macro approach in its global tactical portfolio. Year-to-date, QGTA dipped 2.5% and GTAA was up 1.0%.
Potential investors should also be aware that these types of investments are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for, diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, alts can shine.