Not only has there been convergence between hedge funds and mutual funds, but IndexIQ has led the convergence between hedge funds and ETFs. In 2008, the asset management firm launched the first no load, open end hedge fund replication mutual fund and followed up in 2009 with the first hedge fund replication ETF ever listed in the U.S. CEO Adam Patti says that after building up a track record during these last few years, the firm views 2014 as a year of real growth in distribution, targeting both institutional and retail investors.
How would you explain what exactly these hedge fund replication products are?
AP: In a nutshell, these are products that are designed to give investors the similar risk/return profile of investing in hedge funds, except without having to deal with all the structural tenets of hedge funds themselves including the fees, tax inefficiency, the lockups, all the headline risk you have with hedge funds, and of course, the huge minimums that those hedge funds command.
How are the funds structured? What exactly makes it look like a hedge fund?
AP: What the academics proved aback in the ‘90s is that if you look at hedge fund returns, there’s very little alpha in hedge funds, and what hedge funds are providing is a great diversification vehicle for investors, typically with lower correlation, lower beta to the overall markets, lower volatility, downside protection; and what they found is if you look at hedge fund returns, you can actually determine what asset classes are driving those returns. So if you analyze the returns you find that hedge fund returns are comprised of a series of risk premia related to different asset class exposures. So by determining what those asset classes are, and using liquid proxies for those asset classes, you can mirror the return profile of hedge funds and do so in a fully liquid, fully transparent way.
What are the funds comprised of that make them liquid?
AP: The indexes that we launched back in March ‘07, they mirror the return profile of six different hedge fund strategies (long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets) and what those portfolios are comprised of actually are other highly liquid, broad asset class ETFs. What we do with our investable products is we combine those fixed indexes into different products. So for instance, with QAI, which is our flagship product, that’s a multi-strategy product that uses all six hedge fund strategies. If you look under the hood of what you’re investing in, primarily what you’re investing in are other ETFs: the broad asset class ETFs that everyone knows about.
Are you able to incorporate shorting or derivatives into these products?
AP: We do have a long/short structure, and we use a limited amount of exchange traded futures and swaps for some of those conditions, primarily the short conditions, to make it more efficient for investors. But the majority of the portfolio is other ETFs, long and short.
What are some of the challenges in distributing them? Are investors hesitant to get into this new type of product?
AP: Certainly early on when we launched QAI in March ‘09 people thought, “Well it sounds really great, but I don’t believe you can do it.” Now fast-forward four-and-a-half years, and in fact our mutual fund product has five-and-a-half years of history, nobody would say anymore that we can’t do what we say we can do, because it’s done exactly what we said it would, which is provide the same profile as a hedge fund of funds—same volatility profile, same return profile, same diversification profile. So now the conversation is more about, “Well okay, I see it has a track record, it has critical mass in terms of assets, I can see it doing what you would say it would do—how do I use it in my portfolio?”
Do you see the product as something that can be used alongside hedge funds in a portfolio, or is there really no need to have both?
AP: We’re not anti hedge funds. We think hedge funds are great diversifiers. The question is does an individual advisor or investor have a) the access to those vehicles and b) do they have the expertise to really be doing due diligence on them. So we say, look, if you don’t want to be doing that kind of due diligence and take headline risk, you can use our products for an entire hedge fund allocation. But typically what we find is that investors are using them as complements. So you might use QAI, for instance, as your core hedge fund of funds exposure, and then if you have the skill and expertise, go out and find those alpha-seeking, single-strategy managers to complement.
What are your primary goals for this year?
AP: Our primary goal right now for the company is really just continue to ramp up our asset base. Last year as a company we were up 40%…we’d like to at least grow another 40% this year and continue to make QAI the flagship benchmark for the industry. The way we position it is being really no more than the S&P 500 for the hedge fund market. So if you want hedge fund exposure, here’s the market, and then of course, go out and find alpha elsewhere.
GC Friday Interview: Adam Patti, CEO, IndexIQ
Not only has there been convergence between hedge funds and mutual funds, but IndexIQ has led the convergence between hedge funds and ETFs. In 2008, the asset management firm launched the first no load, open end hedge fund replication mutual fund and followed up in 2009 with the first hedge fund replication ETF ever listed in the U.S. CEO Adam Patti says that after building up a track record during these last few years, the firm views 2014 as a year of real growth in distribution, targeting both institutional and retail investors.