Alternative ETF Opportunities to Hedge Market Risks

As traditional investments hover near record heights, investors may look to liquid alternative investments and related exchange traded funds to diminish portfolio risks.

In the Seizing Alternative ETF Opportunities panel on the annual online ETF Trends Virtual Summit (available on-demand for up to 4 CE Credits), Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, pointed to four main alternative investments that investors have traditional utilized to diversify away from stocks and bonds, including real estate, commodities, hedge fund strategies and private equity.

Breaking down broad groups, especially among the various hedge fund strategies, Bruno specified some particular alternative investment strategies that have grown in popularity since the financial downturn, such as long/short equity that take both long and short stock positions, unconstrained bond that invest tactically across individual fixed income sectors, global macro that try to capitalize on various global economic variables that affect investments, merger arbitrage that focus on opportunities from corporate transactions, multi-strategy that allocates among various alternative strategies in response to market opportunities and market neutral that matches short against long positions to neutralize risk.

Bruno sees investors are increasingly seeking diversification tools like alternative assets as intertwined global financial markets result in greater correlation across assets.

“The lower correlations to traditional stock and fixed-income investments may result in enhanced diversification,” Bruno said.

For example, the IQ Hedge Multi-Strategy ETF (NYSEArca: 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.

Investors focus on specific strategies through targeted alternative ETFs. For instance, the Index IQ Merger Arbitrage ETF (NYSEArca: MNA) provides investors with a diversified approach to a group of takeover targets. The ETF 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.

Additionally, the IQ Leaders GTAA Tracker ETF (NYSEArca: QGTA) follows tactical asset allocation or event driven strategy that adapts to changes in the market environment. The IQ Hedge Event-Driven Tracker ETF (NYSEArca: QED) is also designed to mirror hedge funds’ event-driven strategies.

The IQ Hedge Long/Short Tracker ETF (NYSEArca: QLS) is designed to mirror hedge funds’ long/short strategies.

The IQ Hedge Market Neutral Tracker ETF (NYSEArca: QMN) tries to give consistent returns in any market with low volatility. The ETF is the first to use a market neutral strategy by copying market neutral hedge funds.

The IQ Hedge Macro Tracker ETF (NYSEArca: MCRO) tries to replicate the risk-adjusted return characteristics of a macro strategy.