The second hedge fund replication ETF from IndexIQ began trading on Tuesday (6/09/09). According to the press release, the IQ Hedge Macro Tracker ETF (MCRO) seeks to deliver risk-adjusted return characteristics similar to macro and emerging-market style hedge funds.

IndexIQ maintains indexes representing seven separate hedge fund strategies. Their first ETF, the IQ Hedge Multi-Strategy Tracker ETF (QAI), was launched on March 25 and is a composite of all seven underlying strategies.

The new MCRO ETF is designed to track two of the underlying strategies: the IQ Hedge Global Macro Beta Index and the IQ Hedge Emerging Markets Beta Index. The allocation to each strategy will change over time using a rules-based methodology.

MCRO will not invest in hedge funds. Instead, using factor and quantitative analysis, it will invest in other ETFs in an attempt to replicate the performance of hedge funds. Unlike secrecy-shrouded hedge funds, the holdings of MCRO are published daily in the fund summary section of the website. The fund currently has more than 37% allocated to emerging market equities with significant holdings in both iShares MSCI Emerging Markets (EEM) and Vanguard Emerging Markets (VWO).

The jury is still out on the potential success of hedge fund replication products. Many fans would like to see these products succeed. However, hedge fund managers are hoping for failure, otherwise their fee structures (2% plus 20% of the profits) become hard to justify.

On the subject of fees, MCRO has a 0.75% expense ratio that is in addition to the expense ratio of the underlying funds (which will vary over time as holdings change). Additional information about MCRO is available, including the ETF fact sheet and the index fact sheet.