There's hasn't been much good news in the world of hedge funds recently. Performance has been lousy and investors are heading for the hills. As a Bloomberg article this week points out, outflows from hedge funds were $15 billion in the first quarter, the largest since 2009.
Understandably, investors have been disappointed by the returns in hedge funds. Far from offering the alpha that investors desire, these funds have struggled just to keep up with vanilla stock indexes like the S&P 500.
In the year-to-date period through April 19, the HFRX Global Hedge Fund Index lost 1.3%, compared with a 3.5% gain for the S&P 500. That follows seven-straight years of underperformance between 2009 and 2015.
ETF Assets Top Hedge Funds
With performance so abysmal, it's no wonder investors may be reassessing the asset class. Total hedge fund assets now amount to $2.86 trillion globally, according to Hedge Fund Research Inc., below the $3 trillion worth of assets in ETFs.
Of course, the bulk of the money allocated to exchange-traded funds is aimed at passive investments ― the antithesis of hedge funds. Those include the $187 billion SPDR S&P 500 ETF (SPY | A-98) and the $35 billion iShares Core U.S. Aggregate Bond ETF (AGG | A-98).
It's fair to say that the majority of investors in ETFs shun the alpha-seeking strategies of hedge funds. But not all of them.
There's a small, but growing, amount of money in ETFs tied to active strategies, with hedge fund strategies among them.
Different Wrapper, Same Underperformance
On the plus side, thanks to the ETF wrapper, these strategies are widely available to investors of all stripes at relatively low costs. That's in contrast to actual hedge funds, which are typically only open to accredited investors and have high costs associated with them.
That said, these hedge-fundlike ETFs haven't performed much better than hedge funds themselves.
The largest of these ETFs is the IQ Hedge Multi-Strategy Tracker ETF (QAI | C-73), which has $1.1 billion in assets. QAI uses several hedge fund investment styles to emulate the returns of a multistrategy fund of funds. These include long/short equity, global macro, market neutral, event driven, fixed-income arbitrage and emerging markets.
Currently, QAI has a heavy allocation to fixed income. Its top six holdings are all fixed-income ETFs, representing 57% of the portfolio. A year ago, QAI'S portfolio was quite different, and held a 41% position in a single fund, the iShares MSCI All Country Asia ex Japan ETF (AAXJ | B-93).
In terms of returns, QAI has done a bit better than the aforementioned HFRX Global Hedge Fund Index this year, but it's still lagging the S&P 500. The ETF is up 2.2% so far in 2016, slightly below the S&P 500's 3.4% return.
YTD Returns For SPY, HFRX Global Hedge Fund Index, QAI