Dan Petersen, Director of Product Management for IndexIQ, explained that the low correlation helped these alternative strategies zig while the equity markets zagged. For example, during the recent 2007 through 2009 financial crisis when the S&P 500 exhibited a negative drawdown of -50.9% at its worst, the fund weighted index declined -21.4%, the market neutral strategy fell -6.5% and the merger arbitrage index dipped -6.6%.
However, potential investors should be aware that these various alternative strategies also follow cycles or perform differently in varying market environments. For instance, the HFRI Yield Alternative Index was among the best performing alternative strategies in 2016 but the same index was also the worst performing in 2017.
Consequently, investors may look at a combined portfolio of the various hedge fund strategies as a way to smooth out the edges. While the HFRI fund-of-funds experienced lower returns than the S&P 500 in periods of strength for the stock markets, the fund-of-funds alternative strategy has exhibited lower drawdowns in down periods and shown more attractive return-per-unit of risk or better Sharpe ratios in equity up markets. The alt strategy is characterized as “attractive Sharpe when wanted, less negative impact when needed,” Petersen added.
While the average retail investor and advisor may not directly access HFRI fund-of-funds index, one may look to something like the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI), which exhibits similar diversification characteristics as the HFRI benchmark.
“HFRI FOF Index can be seen as a close version of beta to hedge funds,” Bruno said.
QAI is the largest alternative strategy ETF on the market and 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 market hedge.
Financial advisors who are interested in learning more about alternative strategies can watch the webcast here on demand.