IndexIQ - Best ’40 Act Liquid Alternatives Fund

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The IQ Hedge Multi-Strategy Tracker ETF (`QAI') seeks to replicate the risk-adjusted return characteristics of hedge funds using multiple hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets. 

Since its inception in 2009, QAI has outperformed the Barclays US Aggregate Bond Index during all 12 rising rate periods. Based on IndexIQ's proprietary rules-based process, QAI rebalances exposures across the broad hedge fund strategies to respond to the changing dynamics of the market. To clarify, QAI does not invest in hedge funds and the Index it tracks (IQ Hedge Multi-Strategy Index) does not include hedge funds as components, thus avoiding the lock ups, high fees and idiosyncratic manager risk inherent with individual hedge funds. "Instead, the index is made up of ETFs that, when combined, replicate the risk/return characteristics of six hedge fund strategies," explains Adam Patti, Founder and CEO of IndexIQ. 

Here are a few additional features: 

• Seeks performance similar to the overall hedge fund universe; 

• Seeks low correlation to the equity market; 

• Tax-efficient – historically has not paid out short term capital gains. 

"When we designed QAI and its underlying index, we sought to deliver true `hedge' fund performance, i.e., not a product that's designed to shoot the lights out, but rather a vehicle that was intended to provide investors with a means to mitigate volatility, protect against downside risk, and allow for upside participation," comments Patti (pictured). "QAI has performed consistent with that mandate and investors have definitely responded to its potential role as a fixed income alternative. Investors increasingly consider QAI as the S&P 500 of the hedge fund market. It provides broad market/asset class exposure that is used as a core holding in one's portfolio."

QAI returned approximately -2.5 per cent last year (inclusive of fees), though that number doesn't tell the whole story. In the second half of 2015, market volatility increased substantially, with the S&P declining more than 6 per cent in August alone. That same month, QAI returned -1.66 per cent, indicating resiliency in a challenging market. 

"Additionally, QAI has never paid out short-term capital gains on portfolio turnover in its nearly seven-year history," confirms Patti. 

As mentioned, the IQ Hedge Multi-Strategy Index is composed of six sub-indices, each replicating one of the main hedge fund strategies. Each month, the sub-indices are examined and scored according to a number of factors (including a strategy's momentum of returns and volatility) and are then reweighted based on that analysis. It is, says Patti, "a similar process that a FoHF manager might undertake in rebalancing their strategy allocation. However our process is 100 per cent rules-based."

Investor interest in QAI has been strong over the last 12 months as volatility has come back to the fore. Not only that, but factors such as divergent central bank policies, the US Fed's move to raise interest rates, the ongoing U.S. Presidential election, and more, have all combined to bring hedging strategies to the forefront for many investors. 

"QAI, being the first ETF of its kind, has the longest track record in the category, stretching back to March 2009, so investors can see how the fund has performed during a number of turbulent times. As a fixed income alternative or an alternative to traditional hedge fund exposure, the fund continues to find numerous uses across investor types," confirms Patti

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