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