This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by Mike Venuto, co-founder and chief investment officer of New York-based Toroso Investments.
This month, Debbie Fuhr’s London-based ETF consultancy ETFGI made headlines with data showing that global ETP assets are now equal to hedge fund assets. It’s important to note that this inflection point coincides with record assets under management for WisdomTree (WETF).
For those who didn’t make the connection, WisdomTree has 60 percent of its assets in currency-hedged products that were modeled off of established hedge fund trades.
Perhaps the parity reached in the hedge fund assets to global ETP assets can be partially attributed to the role ETFs have played in democratizing exposures that have traditionally only been available to investors willing to pay a 2 percent management fee and 20 percent of their profits with 10-year lockups.
With WisdomTree’s success in mind, we got to thinking: What other hedge fund trades are now available through ETFs, and what else could be done in the future? So, we took a deeper look into this emerging ETF category and here’s what we found…
First, There Was QAI
Let’s review the evolution. IndexIQ, now a unit of New York Life, deserves credit as the pioneer in the hedge fund replication landscape with the launch of the IQ Hedge Multi-Strategy Tracker ETF (QAI | C-56). It took many years, but the ETF is now the go-to alternative ETF for many wire-house platforms and has gathered $1 billion in assets under management.
The ETF has consistently outperformed the hedge fund tracking indexes. The irony is that the returns of hedge funds as a whole and QAI are less than exciting for investors, annualizing at around 4.3 percent since inception, although with minimal volatility.
To be fair, QAI isn’t designed to knock the cover off the ball. It’s meant to produce fairly reliable, if muted, returns, perhaps a bit like a bond fund.
But QAI led to a whole set of hedge fund-like products that I call the cherry-pickers. Today there are six ETFs that seek exposure to the top ideas of hedge fund managers. The goal of these products is not to replicate returns but to capture the alpha. For the most part, they have worked and produced excess returns above traditional indexes.
Again, the hedging aspect—central to QAI and to hedge funds historically, which is designed to reduce volatility—is absent from most of these products. The AlphaClone Alternative Alpha ETF (ALFA | D-63) is the exception; the index includes a moving average calculation that allows the ETF to take a short position on the S&P 500. Below in the table are a few of these cherry-pickers.
|AlphaClone Alternative Alpha||ALFA|
|Global X GURU||GURU|
|Global X GURU Activist||ACTX|
|Global X GURU International||GURI|
|Global X GURU Small Cap||GURX|
We noted above that, today, 60 percent of WisdomTree’s assets are now currency-hedged.
This trade or exposure has long been a darling in the hedge fund community. WisdomTree has been rewarded for democratizing this exposure with assets and the biggest compliment any ETF sponsor can receive. Deutsche Bank was an earlier copier of the currency-hedging concept.
But the arrival in the currency-hedging space of BlackRock’s iShares completely legitimized the currency-hedging concept, even though the world’s biggest ETF company was arguably a bit late to the game. Among those new funds that began coming to market in January 2014 was the currency-hedged iShares MSCI EAFE ETF (HEFA | D-48). It also has strategies focused on Japan, the eurozone and emerging markets.
While this kind of competition may be flattering for WisdomTree, Toroso believes the more interesting news in the currency-hedged space is the newcomers like the AdvisorShares Gartman Gold/Euro ETF (GEUR | D-28). This fund allows investors to buy gold exposure while shorting the euro.
We expect to see more currencies paired with commodities in ETFs in the future.