New ETF - IQ Hedge Multi-Strategy (QAI)

The Vanguard of alternative investing is here. IndexIQ, the alternative investment ETF pioneer, has launched this week a new ETF, called the IQ Hedge Multi-Strategy Tracker ETF (NYSE Arca: QAI).

According to the press release – available here – QAI seeks to replicate the returns on the IQ Multi-Strategy Index, before fees and expenses. The index attempts to replicate the risk-adjusted return characteristics of the collective hedge funds and uses multiple investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income, arbitrage, and emerging markets.

The QAI is an ETF of ETF’s. According to the fact sheet, the ETF doesn’t invest directly in hedge funds, but rather in the underlying ETF’s , which the press release says they are widely available and liquid. The ETF will bring together the convenience of the ETF’s with the access to alternative investments.

Its top ten holdings are (as of 12/31/2008):

-                   AGG – iShares Lehman Aggregate Bond Fund – 21.57%

SHY – iShares Lehman 1-3 Year Treasury Bond Fund – 19.55%

EEM – iShares MSCI Emerging Markets Index Fund – 11.59%

HYG – iShares iBoxx       High Yield Corporate Bond Fund – 8.43%

BND – Vanguard Total Bond Market ETF – 6.38%

DBV – PowerShares DB G10 Currency Harvest Fund – 5.61%

SHV – iShares Lehman Short Treasury Bond Fund – 4.56%

JNK – SPDR Lehman High Yield  - 3.98%

EFA – iShares MSCI EAFE Index Fund – 2.93%

VWO – Vanguard ETF Emerging Markets – 2.92%

The Asset Allocation as of 12/31/2008

Short – term bonds – 28.56%

Broad bonds – 27.95%

International Equity – 17.44%

High Yield bonds – 12.41%

Currencies – 8.08%

Commodities – 1.7%

International bonds – 1.19%

TIPS bonds – 1.18%

US Equity (inverse) – 0.97%

Real Estate – 0.51%

The IQ Hedge MS index shows a correlation with the S&P 500 in the range of 0.20 (April ’07) to 0.82 (November ’08). The ETF itself seeks low correlation with the equity market.

Backtesting the ETF for the past 5 years shows that $10,000 invested five years ago have grown to about $13,500 today, in stark difference with the $9,700 you would get had you invested in the S&P 500 Index over the same period.

Some of the features and benefits:

• -       Seeks performance similar to overall hedge fund universe
  
• -       Seeks low correlation to equity markets
  
• -       Lower fees than the typical hedge funds
  
• -       Intra-day liquidity
  
• -       Portfolio transparency
  
• -       No manager-specific risks (although the underlying ETF’s have manager specific risk)
  
• -       Rules based approach
  

Index data:

Index Symbol – IQHGMS

Alpha (vs. S&P 500) – 6.7%

Beta (vs. S&P 500)  – 0.41

Sharpe Ratio – 0.43

Correlation (vs. S&P 500) – 0.73

 

 

Weekly update - March 8, 2009

From weIMG newsletter:

Employment numbers topped this week's economic news. Another 651,000 jobs (US, non-farm) were lost in February pushing the unemployment rate up to 8.1%, the worst since the Volcker recession of the early 1980's. A more broad gauge of unemployment which includes part-time workers seeking full-time employment puts the unemployment level at 14.8%. That's more than 1 of every 7 employable persons. Ouch.

In the meantime productivity is actually up. Anyone with a macroeconomics course under their belt should not be surprised by this. Employers slash the workforce and make remaining employees to produce more per employee. Eventually, these workers will demand additional compensation for their increased productivity, incomes go up, the AD curve shifts out, firms increase hiring, and we return to equilibrium. Sounds simple, right, but how long until it all unfolds?

Equities
Just how many new "worst weeks of 2009" will we have? Bank worries, unemployment numbers, continued housing troubles….take your pick, stocks just keep going down. Sparing the repetitive commentary, here is the weekly, year-to-date, and "from peak" performance of the major US indexes:

S&P500: week = -7.03%; YTD = -24.34%; from peak = -56.34%
Dow: week = -6.17%; YTD = -24.49%; from peak = -53.21%
Nasdaq: week = -6.10%; YTD = -17.96%; from peak** = -54.75%

**For the Nasdaq the "from peak" return is from October 2007; not from the high of the dot com bubble. The Nasdaq is currently down 74% from the bubble peak reached March 10, 2000.

Bonds
At least we have returned to normalcy in the Treasury market. Treasuries posted solid gains this week thanks to the turmoil in the equity markets. The yields on the 10 and 30 year fell to 2.83% and 3.50% from 3.04% and 3.72%, respectively.

The TED spread reflected investors' preference for safe Uncle Sam debt over that of corporations. The spread climbed to 110 basis points from 102 the prior week. For historical reference, the TED spread typically ranges from 20 to 50 basis points under normal conditions. It peaked over 450bps last October. Click the link below for TED spread chart, then click the 5 year button, it gives a pretty good indication of just what a mess we are in.
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

What to look for next week:
Capitulation…hopefully.
Thursday morning - Retail Sales - Consensus is for a drop of 0.5%. Did you know retail sales were actually up last month? It seems this positive nugget got buried by the other apocalyptic headlines.
Friday morning - Consumer Sentiment - Consensus is for a slight drop to 55 from 56 in January.
Friday morning - International Trade Gap - The net imbalance is expected to shrink from $40B in January to $38B for February.