New York-based IndexIQ has unveiled what it describes as the first no-load open-ended US mutual fund based on hedge fund replication and designed to give investors access to hedge fund-like performance characteristics.
The IQ Alpha Hedge Strategy Fund uses a proprietary investment process to synthesize the risk and return profiles of a broad range of hedge fund investing strategies, striving to deliver hedge fund-like performance in a low cost, transparent, and highly liquid investment vehicle.
'Interest in hedge funds has grown enormously over the past decade, but the vast majority of investors have not had access to this important asset class,' says IndexIQ chief executive Adam Patti.
'High net worth requirements and regulatory restrictions, among other factors, have essentially limited participation to wealthy individuals and institutions. The IQ Alpha Hedge Strategy Fund opens up hedge fund-style investing by providing access to hedge fund performance in an open-end mutual fund.'
The IQ Alpha Hedge Strategy Fund is based on the firm's belief that 'alternative beta' - returns due to varying exposure to different asset classes - is the primary driver of aggregate long-term hedge fund portfolio performance.
That beta is captured initially in the IQ Alpha Hedge Index, which uses proprietary algorithms to replicate the returns of six major hedge fund strategies, equity long/short, global macro, emerging markets, fixed-income arbitrage, equity market neutral and event driven. Alpha is then sought by optimising the relative index weights among the six strategies.
The IQ Alpha Hedge Index seeks to provide superior returns with lower volatility relative to the S&P 500, and with a correlation similar to that between hedge funds generally and the S&P index. The IQ Alpha Hedge Strategy Fund aims to generate a total return that corresponds to that of the IQ Alpha Hedge Index before fees and expenses.
In constructing the fund, IndexIQ uses exchange-traded funds and other highly liquid financial instruments to provide exposure to the components of the index in approximately the same weighting.
The fund employs leverage equivalent to 25 per cent of the portfolio to magnify returns. In both the index and the fund, the characteristics of the underlying strategies are replicated without exposing shareholders to the idiosyncratic manager risk of hedge fund investing.
'A significant body of academic research supports the ability of hedge fund replication strategies to capture the characteristics of broad-based hedge fund returns without the associated costs and risks of investing directly in the underlying strategies,' says Professor Robert F. Whitelaw, chairman of the finance department at New York University's Stern School of Business and chief investment strategist at IndexIQ.
'The IQ Alpha Hedge Strategy Fund employs the latest research and modelling techniques to provide access to these strategies in a low-cost, open-ended investment vehicle.'
Based in Rye Brook, New York, IndexIQ is a developer of so-called Rules-Based Alpha investment products that seek to combine the benefits of traditional index investing with the alpha potential sought by the best active managers. The Rules-Based Alpha philosophy aims to make institutional-class investment strategies available to all investors. IndexIQ strategies span a broad range of asset classes and product categories.