Global X Registers Hedge Fund ETFs

March 27, 2012

Global X offers access to investment spaces typically only open to high-net-worth individuals.

Global X, the New York-based ETF firm known for its niche strategies, filed paperwork with the U.S. Securities and Exchange Commission to bring to market four ETFs with a focus on providing access to hedge-fundlike and activist investment strategies.

The four new Global X funds provide access to investing spaces that typically charge high fees and are only available to individuals with net worth of more than $1 million and an annual income of at least $200,000. The four funds, for which Global X did not list tickers or annual expense ratios in its filing, are as follows:

  • Global X Top Hedge Fund Equity Holdings ETF, which comprises the top U.S.-listed equity positions held by a select group of the world’s premier value investors
  • Global X Top Value Guru Holdings ETF, which comprises the top U.S.-listed equity positions held by a select group of the world’s premier value investors
  • Global X Top Activist Investor Holdings ETF, which comprises the equity positions of the world’s premier activist investors
  • Global X Listed Hedge Funds ETF, which comprises the securities and GDRs of publicly listed hedge funds globally. The securities are screened for liquidity and weighted according to modified free-float market capitalization.

 

Hedge funds have become quite popular in the past generation, and sometimes with good reason. Some, like Paulson & Co., made a fortune by betting against the financial institutions during the run-up before the housing bust in 2008. But many went bust in the downturn, in part because their sky-high costs were out of step with investors rattled by the market crash. Moreover, performance lagged for many. Last year, for example, they underperformed the market, according to the Financial Times. The S&P 500 Index was unchanged last year, but global macro hedge funds were down 3.5 percent.

Still, there were an increasing number of ETF firms serving up hedge-fund replication strategies in an index ETF wrapper. There are a bevy of funds that employ hedge-fundlike strategies such as the $15.9 million ProShares Hedge Replication ETF (NYSEArca: HDG), which launched last summer and comes with an expense ratio of 0.95 percent. There also are competing products from providers such as IndexIQ, which specializes in hedge funds strategies, and AdvisorShares.

The pioneer in the hedge fund replication space is IndexIQ’s $199.1 million Hedge Multi-Strategy Tracker ETF (NYSEArca: QAI), which has total annual operating expenses of 1.06 percent.

Global X Plans

The four Global X funds use a passive replication strategy and are based on indexes designed by Frankfurt, Germany-based Structured Solution AG Indexes, which will select securities based on quarterly paperwork that hedge funds and activist investors file with the U.S. Securities and Exchange Commission. The stocks in all four funds will be screened for liquidity, will be equal weighted and rebalance quarterly.

Each fund will invest at least 80 percent of its total assets in the securities of the underlying indexes. According to the filing, over time the correlation between the performance of the ETFs and their underlying indexes is expected to exceed 95 percent.

One of the principal risks of investing in the two hedge fund ETFs is that 13F filings used to select the securities in the underlying indexes are filled by each hedge fund approximately 45 days after the end of each calendar quarter. Therefore, a given hedge fund may have already sold its position by the time of the 13F Filing.

As a result, a given hedge fund may not hold the position at the time when the position is added to the underlying index.

 

 

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