The third fund in this group, the IQ Alpha Hedge Strategy fund (IQHIX), sports an annualized return of 2.76 percent during the past three years while charging a relatively modest 1.16 percent expense ratio. Morningstar gives this fund the only positive weighting in the group and has awarded it three stars and a bronze medal. “The IQ Alpha fund does overweight some of the hedge fund strategies that have done better in the last six months, and it is cheaper than its competitors,” Charney says.
Hedge fund replicator funds have an elegant underlying strategy, and the results thus far have demonstrated their ability to quantitatively capture the return stream of hedge fund indices. However, recent hedge fund index returns have been disappointing, and advisors may find that the diversification benefits are not sufficient to justify the funds’ high expense ratios and relative underperformance.
But for advisors concerned about the financial markets going forward and looking to reduce the beta of clients’ portfolios while accepting the potential for periods of underperformance, the IQ Alpha Hedge Strategy has shown itself to be a product that could give clients some hedge fund-like exposure with the possibility of index outperformance without the high costs.
Keep in mind that the hedge fund replicator strategy as a whole should do better in the right market conditions. The wrong market is what we’ve experienced since the financial crisis where most risky assets have moved higher in lockstep due to central bank stimulus around the globe. The right market would be one with diverse returns to different asset classes in non-correlated moves.