Hedge fund ETFs claim to do what many hedge funds these days cannot: provide high returns. What's more, ETFs often offer fees that are generally quite a bit lower than those of their counterparts, making for an especially enticing offer. For investors that have grown frustrated with hedge funds and their lackluster performance in recent months, these ETFs may seem like a promising alternative. But can the ETFs back up their claims? Is it really worth the investment?
Hedge Funds Vs. ETFs in Terms of Performance
Hedge fund investors certainly have many reasons to look for other ways to use their money. According to Hedge Fund Research, hedge funds overall have returned just 4.3% annualized in the past five years, through April of 2017. This is far below the S&P 500 returns of 14% over the same period. Barron's points out that Bill Ackman of Pershing Square Capital Management has suggested that the 2-and-20 model may have to be reconsidered in light of those poor performance figures.
On the other hand, hedge fund ETFs don't necessarily have the best returns, either. The ProShares Hedge Replication ETF brought in returns of 4.9% for the year ending April 30th, 2017, while the IQ Hedge Multi-Strategy Tracker brought in just 1.9%. With figures like these, it's not immediately clear that hedge fund ETFs will give you more return for your money as compared with standard hedge funds.
Is the Nature of ETFs to Blame?
Perhaps the problem is in the nature of ETFs. While most people invest in hedge funds for outsized returns, this is not what hedge fund ETFs are built for. Rather, they typically act as an alternative to standard stock market investing that provides a low level of volatility. Adam Patti, the CEO of IndexIQ, described his ETFs as "typically [having] lower volatility and lower correlation," saying they "move differently in different market environments."
That being said, many hedge fund ETFs have a correlation with the S&P 500 of up to 80%, so they move up and down with the general markets. Patti continues, saying that "were not trying to beat the hedge fund market, we're trying to be the hedge fund market." His point in this case is that hedge funds themselves are more closely tied to the general markets than ever in their previous history. The issue seems to be that when an ETF provides wide exposure to a broad array of hedge funds, they are not exactly able to capture the goals of those individual funds. Hedge funds are highly selective and specialized investing agents, and combining a number of them together means that one is likely diluting the power of any individual fund's investing strategy. For that reason, the low fees associated with ETFs may not be worthwhile.