Investing in hedge funds has been a huge fad with high-net-worth individuals and institutions. Now exchange traded funds are trying to replicate hedge-fund strategies in index-based portfolios.
“Sounds good, but alas, government regulations restrict hedge fund managers to accepting only so-called ‘accredited investors’ — which means you have to have $1 million in assets or an annual income of $200,000 (or $300,000 if you are married). That leaves a lot of us out — and even more of us after a new Dodd-Frank provision goes into effect, prohibiting you from counting the value of your house in your assets tally,” Brad Hessel for The Motley Fool wrote on Daily Finance.
A hedge fund is an aggressively managed portfolio of investments that uses sophisticated strategies such as leverage, long or short positions and derivatives. High returns are the objective. Hedge fund investments are not liquid and are set up as private investment partnerships, according to Investopedia.
ETF providers have decided to get in on the compounded returns. ETFs that are supposed to give back hedge-fund-like returns are on the market, following the exact strategies that their predecessors have, reports Hessel. This ETF sector of the market only dates back to about 2009.
The downside is that the trend has not caught on. Many of the ETFs that are listed as hedge funds have under $1 million in assets under management. Most of these funds are fairly young and have not had enough time to generate a track record. Investors are wary when there is not enough support to validate putting capital into a hybrid fund.
A few of the more popular funds:
- WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI) $250 million in assets under management (AUM) [ETF Spotlight: WDTI]
- IQ Hedge Multi-Strategy Tracker (NYSEArca: QAI) $200 million in AUM [ETF Chart of the Day: QAI]
- Credit Suisse Merger Arbitrage Liquid Index (NYSEArca: CSMA) $90 million in AUM [ETF Spotlight: CSMA]
Tisha Guerrero contributed to this article.