Another lens through which to view returns of core hedge fund exposure is to examine how those returns vary in different fixed-income environments.
Now that we know why we should have an allocation to QEH, let's go back to those four fundamental issues with hedge funds:
- Their high cost
- Tax inefficiency
- Lack of liquidity
- Lack of transparency
Typical hedge funds have annual costs of almost 400 basis points, or $400 per $10,000 invested.
If the manager is consistently good at generating alpha, then this hurdle is manageable. If not, it becomes a very high hurdle.
QEH caps expenses at 150 basis points and aims to match the HFRI Equity Hedge Index, making it a great core solution to your hedged equity allocation. It also allows you to satellite active managers around it.
Most equity-hedged managers are tax inefficient because their marginal investor is a nontax-paying institution.
Furthermore, you get your flash return number at the end of the calendar year, but you don't get your after-tax return until late summer when your K-1 arrives. This makes the job of calculating your after-tax return harder.
With QEH, your taxable event occurs when you choose to sell your position. For 2013, your net return was 12 percent, and your after-tax return was 11.2 percent.
Most equity-hedged managers have lockups and gates that reduce your liquidity.
Since QEH is an exchange-traded product, liquidity is available whenever the markets are open. You are subject to the bid/ask spread and to the premium/discount to net asset value like any ETF.
This is why you need to use limit orders and be aware of the underlying value of the holdings. QEH has more than a year of trading history, but less than $10 million in assets, so you need to be very aware of the above.
Finally, most equity-hedged managers will not share their holdings with you. They feel this is part of their intellectual property, and is the reason they justify their high fees.
With QEH, the underlying holdings are available on a real-time basis. There are no surprises.
As QEH gains popularity, the assets under management should increase and the trading shortfall will abate. In the meantime, this is a great product for one's asset allocation to liquid alternatives as a core holding.
A pioneer in managing all-ETF portfolios, Main Management, LLC is committed to delivering transparent, cost-efficient, and customized investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency. www.mainmgt.com.