Hedge Fund ETF: IndexIQ (QAI)

The IQ Hedge Multi Strategy Tracker ETF (QAI) or as it is being commonly referred to — the shiny new Hedge Fund ETF has generated a lot of interest lately.

I think this has more to do with the branding of the fund, than the fund itself. This fund seeks to generate returns that are similar to a Hedge Fund.

This doesn’t mean that QAI invests in hedge funds directly. Only that it uses strategies that will generate hedge fund like returns.

What are Hedge Fund Like Returns?

Index IQ has created a — IQ Hedge Multi Strategy Index – which tracks third party index showing hedge fund returns.

This index has been created with underlying funds that look to replicate six major hedge fund strategies:

  1. Long Short Equity
  2. Global Macro
  3. Market Neutral
  4. Event Driven
  5. Fixed Income Arbitrage
  6. Emerging Markets

The fund will replicate the hedge fund returns by investing in several ETFs and other financial instruments. QAI is passive in nature and comes with a relatively low expense ratio of 0.75%.

Fund of Funds

QAI is like a fund of funds and it will invest 80% of its net assets plus any amount it borrows for investing in its underlying index funds.

This basically boils down to investing 80% of QAI’s net assets in pre-determined ETFs. These investments will include ETFs, Inverse ETFs and Ultra Inverse ETFs.

The remaining 20% will be invested in assets that don’t fall under the underlying index. This can be other ETFs, ETNs, Publicly Traded Commodity Pools or directly in the components of its underlying index funds. In addition to these, QAI can also invest in the following type of financial instruments:

  • Future Contracts
  • Swap Agreements
  • Forward Contracts
  • Reverse Repos
  • Options

Top Holdings

QAI holds about 77% of its assets in 6 funds and the remaining 23% are spread across other funds. Here is a break – up of the top holdings of QAI.


As at 03/27/2009

QAI will balance its portfolio at the end of every month and will re-allocate assets based on the market conditions.


The thing that jumped out at me was that they were really bent towards debt instruments. If a large part of their portfolio is invested in debt and continues to be like that — then why not buy the underlying debt instruments instead?

If on the other hand, they change their asset allocation in a few months and even then show a favorable result — this fund might become interesting. For now, it is too early to make a call or or even contemplate investing in this for me.

Disclosure: I am not invested in this at the time of writing.