The Lowdown on the New ETF-Based, IQ Alpha Hedge Open-Ended Mutual Fund

by: Roger Nusbaum July 03, 2008    

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A reader, perhaps prompted by this article at Index Universe, asked for my take on a yet to list (so it appears) open ended mutual fund called IQ Alpha Hedge Strategy Fund. According to the fact sheet PDF there is no symbol yet but as best as I can tell, it will be a regular mutual fund.

Like just about every fund out there, IQ Alpha will seek to "provide superior returns (“alpha”) relative to the Standard & Poor’s® 500 Composite Stock Price Index (the “S&P 500 Index”) with lower volatility than the S&P 500 Index" and do so with a low correlation.

It looks like the fund will use ETFs (but may also use "related securities" too) to create a mix of hedge fund strategies where the mix is 33.33% emerging markets, 33.33% event driven macro strategy, 33.33% global macro, 13.33% equity market neutral, 3.33% fixed income arbitrage and 16.67% long/short equity. If you count all that up you'll notice the fund will use some leverage.

If you look at the fact sheet I think you will see a lot of different things going on with this fund. The six strategies above that will be in the fund are actually indexes that IQ Alpha will mimic. I did not see anything regarding how the weightings above are determined but obviously they didn't come up with the blend because it yielded lousy results in their back test.

Obviously the back test numbers in terms of return and volatility are very good or there would be no fund.

That there are so many moving parts is not in and of itself bad but I wonder how exactly they can know that they will always be able to populate global macro and event driven with ETFs? The PDF lists the ETFs held as of May 31. The list was not particularly inspiring (not a bad thing per se) which is another way of asking how easy will it be in the future for the managers to create their strategies using ETFs, mostly broad-based ETFs based on the current list.

I obviously don't know much about the fund's nitty gritty, I only read the PDF, I'm not sure that the prospectus would address some of my initial questions and the Index Universe article did not address my questions either.

Assuming that the fund generally delivers on its objective any decision to buy would come down to a couple of things--this assumes that some sort of absolute strategy is even appropriate.

For someone looking to tie this up with one fund will this fund be the best way to create the effect? It has more moving parts than the Rydex Funds and the new ELEMENTS ETN (LSC), is simpler better? Could be.

The other obvious question is whether someone with the time would be better off creating the absolute effect themselves blending together their own mix perhaps including more narrow based products like long tin and short platinum (this is an example I used in yesterday's post as I don't think the two have anything to do with each other make the pair nonsensical).

Now to interject a little bit of opinion, when I first heard about the Rydex Managed Futures Fund [RYMFX] my initial reaction was that it would work, I subsequently bought some shares for my HSA. My initial reaction to the IQ Alpha is one of uncertainty.

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This article has 3 comments:

  •  
    Jul 04 08:23 AM
    Wow, great photo. I suggest titling it: "If CNBC were in charge of traffic lights."
    Reply | Link to Comment
  •  
    Jul 04 09:02 AM
    Gee, another quasi hedge fund... But concur with the traffic light comment. The light might be representative of 27/1 leverage awaiting either Federal, or State bailout.
    Reply | Link to Comment
  •  
    Jul 04 01:24 PM
    When I read this, I think "leveraged complexity has historically not had a very good track record", from examples like the genius-laden brain trust at LTCM, the Amaranth Advisors natural gas futures debacle, and others.

    This is virtually guaranteed to be incomprehensible from the standpoint of figuring out the fund's direction, and the myriad ways in which it can be re-shuffled to (attempt to) achieve specific performance goals will doubtless run afoul of The Law of Unintended Consequences.

    Uncertainty is too mild a term to describe my reaction to it.
    Reply | Link to Comment
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