HDG ProShares Hedge Replication

Global X, the New York-based ETF issuer best known for its innovative China sector and hard asset ETFs, announced plans to further expand its lineup with four products. In the SEC filing, the company revealed initial preparations for four hedge fund ETFs, targeting various segments of the in-focus market (see Does Your Portfolio Need A Hedge Fund ETF?).

These four ETFs look to be a little outside the company’s wheelhouse of internationally focused products, but could see investor interest from those looking to match popular strategies being undertaken by some of the investment industry’s most famous personalities. While a great deal of details were not released—expense ratios and ticker symbols were not available—we have highlighted some of the key points from the filing below:

Top Activist Investor Holdings ETF

This proposed ETF looks to play on ‘activist investors’ or those who buy up a large quantity of shares in hopes of turning around/making huge changes in a company. This technique looks to unlock hidden value in a firm and can often times lead to gains for most investors in a security. The strategy has been popularized by a number of investors including, most famously, Carl Icahn (read Three Outperforming Active ETFs).

The ETF looks to implement this strategy by tracking the top equity positions held by a select group of these investors. This group will be determined by Structured Solutions AG and will be based on quarterly regulatory filings that these investors make with the SEC. Like other products on this list, stocks will be screened for liquidity, weighted equally, and adjusted on a quarterly basis.

Top Hedge Fund Equity Holdings ETF

This proposed fund looks to track the top positions from a number of the world’s largest hedge funds. The positions will be determined by looking at quarterly regulatory filings that these organizations have to make with the SEC. Unfortunately, this strategy could run into some issues as hedge funds can move in-between the quarters and the fund could be powerless to match these moves (see HDGE: The Active Bear ETF Under The Microscope).

Nevertheless, it could see inflows thanks to the popularity of hedge fund managers’ strategies and the lack of ways to play these in basket form. Hedge funds are selected for inclusion in the benchmark based on their size and how easy Global X can replicate their positions. The index is calculated as a total return index and is adjusted quarterly while the individual securities are screened for liquidity and are also equally weighted in the benchmark.

Listed Hedge Funds ETF

Arguably the easiest ETF to implement for the issuer, this ETF looks to act as a basket of publically traded hedge fund firms. The underlying index is calculated as a total return benchmark and the component securities will be screened for liquidity and weighted by market cap. This index will also be maintained by Structured Solutions AG (see ETFs vs. Mutual Funds).

In terms of individual holdings the fund could have a wide variety of choices to pick from. While this is pure speculation on my part, the proposed fund could definitely include stocks such as Greenlight Capital (GLRE), the Blackstone Group (BX), Fortress Investment Group (FIG), and Och-Ziff Capital Management Group (OZM). Granted, many of these aren’t ‘pure’ hedge funds, they could still find their way into Global X’s proposed product nonetheless as the crop of pure publically traded hedge funds is pretty small depending on the definition.

Top Value Guru Holdings ETF

This proposed product looks to track top equity positions from a select group of the world’s top value investors, as defined by Structured Solutions AG. Much like other funds on this list, the hedge fund ETF will be calculated as a total return benchmark and will be adjusted quarterly. Also, the stocks are going to be screened for liquidity and will be equally weighted as well (read Five ETFs To Buy In 2012).

Also, the actual stock picks will come from the quarterly regulatory filings form these investors with the SEC, with the index provider deciding which to include in the benchmark. Once again, the filings will be a little stale but this seems to be less of an issue in this proposed product thanks to the lower level of trading that is inherent in value investing.

Hedge Fund ETF Competition

While all four of Global X’s proposed funds look to be first to market ETFs in their respective corners, they could still see a great deal of competition from a variety of hedge fund ETFs already on the market. Easily the most competition will come from IndexIQ and their lineup of hedge fund tracking ETFs.

The most popular ETF in this category is the company’s IQ Hedge Multi-Strategy Tracker ETF (QAI) which has just under $200 million in AUM. Currently, the product is heavily exposed to bonds, allocating most of its portfolio to fixed income ETFs of the short-term variety.

Beyond this, IndexIQ also has the IQ Hedge Macro Tracker ETF (MCRO) which has a respectable $40 million in AUM. This product is also heavy in bonds although it also has decent exposure to currencies and gold as well (see the Zacks ETF Center for more info about ETF investing).

Lastly, there is also ProShares’ Hedge Replication ETF (HDG), a product that is relatively new and hasn’t managed to attract a great deal of assets or volume as of yet. Much like its counterparts, this fund is also focused on short term bonds although it does have a significant component in short S&P 500 exposure as well.

Seemingly, Global X’s funds will be solely focused on equities, suggesting that investors who want more of a stock focus in their hedge fund investing could be persuaded to look at their products over some of IndexIQ’s entrants in the space which are currently focused on fixed income. Given this, and the increased acceptance of hedge fund styles for ETF portfolios, Global X could definitely have a few winners on its hands if it can successfully negotiate the SEC’s regulatory hurdles and bring these hedge fund ETFs to market.

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