|
Published: June 9, 2010
During my former days as a financial
advisor, I'd occasionally get a call or email from someone in
our "Alternative Investments" department trying to drum up
business. Invariably, they wanted me to deposit my clients'
assets into a specialized hedge fund utilizing one esoteric
strategy or another. Quite often the objectives (and returns)
being pitched would pique my interest.
But hedge funds aren't your everyday garden-variety product.
Membership in these private investment partnerships is typically
reserved for "accredited investors" -- those with annual incomes
exceeding $200,000 and/or net worth of more than $1 million.
Unfortunately, that eliminated the majority
of my client base, and most of the general investing public for
that matter.
That's why the good folks at Index IQ have pioneered a way to
"democratize" hedge funds and open the club to everyday
investors like you and me.
Mystique aside, hedge fund managers don't have secret,
can't-miss trading systems -- they are fallible like everyone
else. From time to time, an overleveraged fund blows up in
spectacular fashion and rattles the market for a few days, but
many manage to generate superior risk-adjusted returns and
capture the
alpha that eludes most traditional portfolio managers.
Wealthy investors have taken notice.
The number of hedge funds has swelled from 600 to 9,000 during
the past two decades. Meanwhile, industry assets have surged
more than 30-fold to $1.4 trillion. That accounts for almost
one-third of the market's daily trading volume. The pros in
charge of pensions, college endowments and portfolios of the
rich and famous now allocate as much as 25% to alternative
investments, up from just 3% a few years ago.
Of course, there are myriad different hedge-fund strategies.
Some attempt to deliver positive absolute returns regardless of
whether stocks are moving up or down. Others might profit from
spinoffs or chase down arbitrage opportunities in the
convertible bond market.
In any case, the goal is to seek out and exploit inefficient
prices. To make the most of these opportunities, hedge fund
managers aren't handcuffed by the same restraints as
mutual fund managers. They can use
leverage or short sales, pile into cash,
overweight certain stocks or sectors, use derivatives,
foreign currencies and other instruments as they see fit.
Unfortunately, these funds can be illiquid and cause headaches
at tax time. And management fees are outlandish -- highly
skilled managers usually take 2% to start and then skim off as
much as 20% of any profits each year.
But think of the benefits of combining hedge fund strategies
with the low costs, portfolio transparency and tax efficiency of
an
exchange-traded fund (ETF). Picture that, and then you'll
see what the IQ Hedge Macro Tracker ETF (Nasdaq: MCRO) is
all about.
Launched a few months ago, this innovative
ETF is a synthetic hedge fund. The
index it tracks is unlike any other you'll find -- governed
by a set of quantitative rules and algorithms set down by a
hand-picked team of brainiacs. Chief Investment Strategist
Robert Whitelaw has a mathematics degree from MIT and a Ph.D. in
finance from Stanford.
As I've said, hedge funds come in several different flavors.
This one is macro-driven, meaning geopolitics,
commodity prices,
inflation, employment, interest rates and other big-picture
global factors are carefully evaluated. The conclusions reached
will determine where the portfolio goes -- it could be skewed to
foreign government bonds one day, real estate the next.
At the moment, the portfolio is short small-cap Russell 2000
futures and long emerging markets stocks, short-term bonds,
commodities and foreign currencies. But rather than hold
individual securities, exposure to any given asset class is done
through other ETFs.
For example, the largest holding is iShares MSCI Emerging
Markets (NYSE: EEM), which in turn owns Petroleo
Brasileiro (NYSE: PBR), Taiwan Semiconductor (NYSE: TSM)
and dozens of other emerging market stocks. This fund-of-funds
concept adds another layer of
diversification and protection.
Because MCRO has only been trading a few months, the jury's
still out on whether it can successfully duplicate hedge-fund
performance over the long-haul. But back-tested data shows the
IQ Hedge Composite annually outrunning its Credit Suisse/Tremont
benchmark by more than 300 basis points during the past five
years, with less volatility.
Action to Take --> The fund
isn't cheap. Index IQ charges 0.75% for its services each year
-- in addition to fees for underlying portfolio holdings like
EEM. But that's a tiny fraction of what you'd pay for a true
hedge fund. And if MCRO's managers can successfully read the
macro tea leaves and double-down in just the right spots, it
could be well worth the cost.
-- Nathan Slaughter
Editor
StreetAuthority Market Advisor
The ETF
Authority |
