Generate Low Risk-Adjusted Returns with Alt ETFs

Questioning how much more equities can rise before a significant correction, some investors are turning to alternative exchange traded fund strategies in an attempt to manage volatility.

So-called alternative or liquid alt funds that track long/short and market-neutral strategies help investors diversify portfolios and dampen volatility, reports Eric Balchunas for Bloomberg.

According to Morningstar data, alternative ETFs have been steadily attracting inflows, and now hold about $1.4 billion in assets, about double in size year-over-year.

Investors who are use to growth investments that generate outsized returns will not be impressed by these types of offerings. Instead, hedge-fund-like strategies are intended to diversify, or like the the moniker suggests, hedge stock and bond exposure, providing returns that don’t mirror the performance of traditional equity and fixed-income assets.

The IQ Hedge Multi-Strategy ETF (NYSEArca: QAI ) , with $770.1 million in assets, is the largest hedge fund strategy ETF. The ETF tries to reflect the risk-adjusted return characteristics of hedge funds through various hedge fund investment styles, such as long/short equity, global macro, market neutral, event driven, fixed-income arbitrage and emerging markets. The fund has a 0.94% expense ratio. QAI is up 2.4% year-to-date and generated an average annualized return of 3.7% over the past five-years. On a risk-adjusted return basis, QAI is up 0.41%, compared to the S&P 500′s 0.36%, adjusting for volatility.

The WisdomTree Managed Futures Strategy Fund (WDTI) , which has $156 million in assets, tries to achieve a positive total return in either rising or falling markets that are uncorrelated to broad market equity and fixed-income returns. The fund utilizes a combination of long and short positions in U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities. The ETF has a 0.95% expense ratio. WDTI is down 1.1% year-to-date. However, the fund has shown no correlation to the S&P 500, with about a third of the volatility.

Looking at the long/short space, the ProShares RAFI Long/Short ETF (RALS) identifies opportunities that are implemented through both long and short securities positions. RALS seeks sector neutrality during its annual reconstitution. The ETF has a 0.95% expense ratio. The fund is up 0.8% year-to-date. [ETF Spotlight: Long/Short, Alternative Investment]

Additionally, the IQ Hedge Market Neutral Tracker ETF (QMN) holds both long and short positions in asset classes and minimizes exposure to systemic risk, which is designed to give consistent returns in any market with low volatility. QMN has a 0.91% expense ratio. The fund is up 1.8% year-to-date.

For more information on hedge fund strategies, visit our hedge fund category.