QEH: Another Hedge Fund Replication Attempt
AdvisorShares QAM Equity Hedge ETF (QEH) hit the tape on August 8, 2012. The actively managed fund-of-funds will try to beat long/short equity hedge fund performance, while trying to replicate the characteristics of the benchmark HFRI Equity Hedge Total Index.
The QEH portfolio is directed by Kurt Voldeng and Akos Beleznay of Memphis-based Commerce Asset Management. The firm manages about $43 million. Its subsidiary, Quantitative Asset Management, develops alternative investment products and is apparently the source of the “QAM” brand name. AdvisorShares is a turnkey administrative platform that helps firms like Commerce/QAM offer ETFs to the public. Voldeng and Beleznay are experienced hedge fund consultants, according to the QEH promotional materials, with a combined 30 years in the business.
Because QEH (summary page) is actively managed, its performance is not tied to a specific index. The goal, however, is to deliver risk-adjusted results exceeding 50% of the long/short equity hedge fund universe as defined by the HFRI Equity Hedge Total Index. Hedge funds in this category typically buy long positions in stocks the manager thinks will outperform the market and short stocks expected to underperform.
In QEH, the managers believe they can do much the same thing through a fund-of-funds (ETF-of-ETFs) approach. QEH will hold a mixture of long and inverse ETFs, ETNs, currencies, derivatives, and cash. The combination attempts to achieve net market exposure in the 40% – 60% range.
As of August 20, 2012, QEH had half its holdings in cash or near-cash ETFs like iShares Barclays Short-Term Treasury (SHV) and SPDR 1-3 Year Treasury (BIL). The top five holdings otherwise were Guggenheim S&P 500 Equal Weight (RSP) 6.0%, Guggenheim S&P 500 Equal Weight Financials (RYF) 3.0%, ProShares Short Euro (EUFX) 2.8%, iShares Russell 1000 Growth (IWF) 2.7%, and SPDR S&P Emerging Small Cap (EWX) 2.6%.
Analysis/Opinion: Being new, QEH obviously has no track record so assessing the likelihood of success is difficult. The prospectus (pdf) discloses a two-year prior performance record for Commerce in separately managed accounts labeled the QAM Equity Hedge Liquid Strategy Composite. The composite has substantially similar objectives, policies, and strategies as those of the fund. For what it’s worth, the firm’s one-year return for the period ending June 30, 2012 was -7.7% and its two-year annual performance was +2.3%. Meanwhile, the HFRI Equity Hedge (Total) Index had returns of -7.4% and +2.7% for the same periods. The performance of the QAM Equity Hedge Liquid Strategy Composite would have been lower if it had been subject to all of the fees and expenses applicable to the Fund.
Fees for QEH are considerably higher than most ETFs, even the actively managed ones. To be sure, it is lower than the 2% management/20% incentive arrangement common in the hedge fund world. QEH has a 1.00% management fee, “other expenses” estimated at 0.39%, and acquired fee expenses (presuming the current portfolio mix) of 0.25%. This adds up to 1.64% in total annual costs.
Identifying direct competitors of QEH is not a straight-forward task, but they are likely found in the Alternative Strategy category of the ETF Field Guide. The majority of the products in this 35-fund category utilize some combination of long and short positions, but only a handful include pursuing a long/short strategy as part of their name. They include ProShares RAFI Long/Short (RALS), Credit Suisse Long/Short Liquid ETN (CSLS), and AdvisorShares Accuvest Global Long Short ETF (AGLS).
Small investors wanting to play the long/short game have few alternatives. If QEH can deliver superior risk-adjusted returns without the headaches and illiquidity of hedge funds, its fee structure will be a relative bargain. Unfortunately, only time will reveal the answer.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.