Hedge Fund ETFs Under the Microscope

While they are still seen as an obscure asset class by many, hedge funds can play a useful role in a diversified portfolio as they aim to deliver returns with low correlations to the broader market

Hortense Bioy, CFA 24 February, 2011 | 6:42PM

Providing liquid access to hedge fund performance through an ETF wrapper is an appealing idea, especially in an environment of high correlation between asset classes. While they are still seen as an obscure asset class by many investors, we think that hedge funds can play a useful role in a diversified portfolio as they aim to deliver returns with low correlations to the broader market.

At present Europe is home to seven hedge fund ETFs offered by six issuers who use different structures and strategies to achieve hedge fund-like returns. The number of methodologies and their level of sophistication can be daunting and leave investors wondering what the differences between all the products are. In this article we will shed some light on the hedge fund ETFs currently on offer in Europe and discuss their advantages as well as their shortcomings.

Separating the Alpha from the Beta
First, it’s important to make a distinction between those ETFs that try to replicate hedge fund performance and those that track actual hedge fund performance.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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