Replace Your Fixed Income Exposure With QAI

Not all hedge fund strategies are meant to deliver outsized gains, as this fund demonstrates.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

If a hedge fund is designed to rely on risk as a way to generate outsized gains relative to the broad market, hedge-fund replicating IQ Hedge Multi-Strategy Tracker ETF (QAI | C-65) is failing miserably at delivering the goods.

But if a hedge fund is supposed to hedge investor bets by going long some stocks, often with leverage, and shorting other stocks in an effort to protect the portfolio from market swings, then QAI is top of the class.

This ETF is marketed as a hedge fund replication strategy. But as an investor, you have to first understand how QAI sees the definition of a hedge fund, and how it goes about replicating it. If you’ve ever been told about the need to go beyond labels and look under the hood, QAI is a prime example of the risks you face if you keep your due diligence superficial.

Performing As It Should

Is QAI missing the mark in a year when hedge funds are reportedly doing great? No. It’s performing just as it should.

The ETF is designed around an index that looks to replicate the risk-adjusted returns of hedge funds using various investment styles, including long/short equity, global macro, market neutral, event-driven, fixed-income arbitrage and emerging markets, according to IndexIQ data.

In other words, QAI is not chasing outperformance, it’s striving to provide a smoother ride that keeps returns mostly in the black, even if modestly.

Think of QAI, perhaps, as having a return profile much like that of a bond investment, except without duration risk. A consistent, dependable, boring performance. In the past year, QAI has barely delivered 1 percent in returns, while SPY rallied 9.5 percent.

Chart courtesy of

Fixed-Income Alternative

In an interview with a few months ago, Adam Patti, chief executive officer of IndexIQ, put it simply: QAI belongs in the “alternatives” sleeve of your core portfolio, and “with its performance profile, it’s a fixed-income alternative, given its volatility profile.”

If you are hoping for alpha-seeking hedge fund managers, Patti says that’s something that belongs in your satellite positions. Since QAI is a multistrategy, multi-asset-class hedge fund replicator, it's more likely to deliver lower volatility with lower correlations to major asset classes. It’s not going to shell out outsized gains.

If you go back two years, QAI’s returns amount to less than a third those of the SPDR S&P 500 (SPY | A-98). Go back three years, and that disparity is even more glaring, with QAI up 13 percent and SPY up 69 percent. But what’s key here is the fact that through it all, QAI has been delivering a smoother ride.

Chasing what hedge funds are doing has its allure, no doubt, and in the ETF market, there are several ETFs today that set out to do just that.

The real question an investor has to answer first is what he or she hopes to get out of a hedge fund replication strategy, and what ETF wrapper best delivers on that goal. Now, go look under the hood.

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.