Be Wary of Hedge Fund ETFs Hedge funds are expensive, says Bill Ackman. ETFs that aim to replicate hedge fund returns are cheap, but you might get what you pay for. By BEN LEVISOHN Updated May 27, 2017 12:55 a.m. ET Bill Ackman on hedge funds: Hedge funds should be a “place where you earn high returns. If it’s not a high-return strategy, you have to compromise on fees.”Bloomberg News At this year’s SkyBridge Alternatives (SALT) conference, Pershing Square Capital Management CEO William Ackman was asked about the state of the hedge fund industry, which has been under siege due to its high fees and disappointing performance. His answer was revealing: Hedge funds, Ackman said, should be a “place where you earn high returns. If it’s not a high-return strategy, you have to compromise on fees.” ETFs by Category Hedge funds have a lot of compromising to do. In aggregate, they’ve returned 4.3% annualized in the past five years ended in April, according to Hedge Fund Research, compared to the Standard & Poor’s 500 Index’s 14% return. This year, the HFRI Fund Weighted Composite Index gained 3.1% through the end of April, still well below the S&P 500’s 7% return. With returns like that, the typical fee of 2% of assets under management and 20% of gains will have to come down, Ackman said. If low fees are what you’re after, there’s no better place than exchange-traded funds, right? A number of ETFs claim to offer hedge fund-like returns while charging less than 1%, and none of those pesky performance fees. But are they really a replacement for hedge funds? It depends what you want from a hedge fund. For some, it’s providing those outsize returns that Ackman mentioned—and used to deliver. Morningstar senior analyst Patricia Oey calls that “super-alpha,” and if that’s what you’re looking for, you should probably stick with, you know, actual hedge funds. To be fair, that’s not what the hedge-fund ETFs are designed to do. Instead, most are configured to act as a low-volatility alternative to the stock market; they buy assets that, when combined, “replicate” the return of hedge-fund indexes. Two examples: theProShares Hedge ReplicationETF (HDG) and theIQ Hedge Multi-Strategy TrackerETF (QAI). It is this aspect that Adam Patti, chief executive of IndexIQ, touts when discussing his ETFs. “They typically have lower volatility and lower correlation, and move differently in different market environments,” he says. More From Barron’s IAC Stock Looks Cheap Despite Recent Rally Peltz’s Trian Lifts Pentair Holdings by $56 Million A Simple GE Trade for Long-Suffering Investors But how different? Not that much. Oey notes that many of these ETFs have a high correlation with the S&P 500—between 70% and 80%—which means that they’re still closely tied to the overall market. They might lose less when the market drops, but they’ll still drop. Gerard Klingman, president of registered investment advisor Klingman & Associates, puts it bluntly: “We’re not sure how that will work,” he says. The returns themselves have been mediocre, even by the low standards they’ve set for themselves. The ProShares Hedge Replication ETF returned 4.9% for the 12 months ended April 30; the IQ Hedge Multi-Strategy Tracker returned 1.9%. The HFRI Fund Weighted Composite Index returned 8.2%. “We’re not trying to beat the hedge fund market,” Patti says, adding that hedge funds themselves have become increasingly correlated to the S&P. “We’re trying tobethe hedge fund market.” And that’s the problem. Morningstar’s Oey says that most of the ETFs provide exposure to the entire universe of hedge funds. But hedge funds are such a disparate group that having exposure to all of them doesn’t really do what hedge funds try to do. She compares the ETFs to a soup that has too many vegetables in it. “Maybe you love carrots, but if you throw everything in there, it turns brown,” she says. “That’s what you’re getting.” Sometimes you get exactly what you pay for. from Barron's
Seems to me the best deal is still buying S&P500 index ETFs. Cheaper and better. Warren Buffett's bet with that fund of funds manager just provided ample evidence of that.
Warren B was lucky. But he is an "informed" lucky man. Nothing better than having Janet at the helmet of the FED. Makes Warren lucky, too!
It is much easier to criticize and pontificate than to perform. Ackman lectured and criticized the other hedge fund managers because he had outsize returns, trouncing the SPY by a wide margin in the last 5 years.