The Myth vs. Realities of Liquid Alts

It’s been nearly a decade since the launch of the IQ Hedge Multi-Strategy ETF (QAI), the first (and still the biggest) liquid alternative Exchange Traded Fund. What made it a compelling idea then makes it a compelling idea now: the opportunity to access an institutional-quality investment strategy with the potentials to improve portfolio diversification and provide risk mitigation during periods of market volatility.

In the years since QAI became available, dozens of new liquid alt ETFs have been introduced incorporating a broad range of strategies that includes merger arbitrage, market neutral, long/short, macro, event-driven, and inflation protection. These funds now hold billions of dollars in assets. Still, misunderstandings remain about how they work, and where they fit in an investor’s portfolio.

To start the New Year, we thought it might be a good time to address some of the more common myths:

• They’re too complex. Like most other ETFs, liquid alts are rules-based products with the strategies detailed in the fund’s prospectus. The IndexIQ liquid alt family is passively managed, meaning that they track an index and seek to capture hedge fund “beta” – the broad market returns inherent in the strategies – not idiosyncratic manager performance. As such, they don’t invest in hedge funds or seek to replicate the day-to-day trading strategies of hedge fund managers. The underlying investment vehicles are generally other ETFs. The ETFs themselves trade daily and the holdings are there for anyone to see. So, while the tools used to create the underlying index may be highly sophisticated, the execution is straightforward.