Macro Tsimmis

intelligently hedged investment

Archive for April, 2012

2012 Volatility Plunges as Market Surges

Posted by intelledgement on Wed, 25 Apr 12

Market volatility in the first quarter was the lowest since 2006—before the crash—and the market was up 12%…which is already +12% better than last year. So…“Is it safe?” For the full story, check out “Calm Before The Storm? Volatility Plunges To Utter Quiescence In 1Q12,” published at Seeking Alpha.

Previous volatility-related articles:

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Hedge-Fund-Strategy ETFs Reconsidered

Posted by intelledgement on Thu, 19 Apr 12

Given the success of historical success of hedge funds—according to Greenwich Alternative Investments, who have been tracking hedge fund performance since 1988, the average hedge fund has a compounded annual growth rate of 13% over the past 23 years, as compared to 7% for the S&P 500—it is no wonder that the purveyors of exchange-traded funds (“ETFs”) have contrived to design offerings pegged to various hedge fund strategies. Last month, we published an analysis of eleven ETFs utilizing hedge fund strategies. While the night is young, metaphorically speaking—none of these funds is more than three years old and a couple have been operating less than a year—the early returns were not very impressive: ten out of these eleven funds were trailing the S&P 500 as of the end of 2011. On average, the S&P 500 had performed +5.7% on an annualized basis while the hedge fund ETFs were -1.3%.

Well now it’s a month later, and the skies have darkened considerably. The S&P 500 had a great first quarter; the ETF hedgie wannabes…not so much:

ETF—30 Mar 12 Symbol Inception CAGR SPY CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% 15.56% -10
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% 14.00% -13
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% 16.42% -15
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% 18.89% -15
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% 14.25% -16
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% 15.88% -17
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% 24.05% -20
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% 20.90% -20
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% 18.23% -20
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% 18.23% -25
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% 14.02% -25
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • SPY CAGR = annualized ROI of the SPDR S&P 500 ETF including dividends since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the SPDR S&P 500 ETF and each hedge-fund ETF since its inception (the higher, the better for the hedge-fund ETF)

Now all eleven ETFs are losing to the market, and losing big: by an average PR of 17. This is because the market is on average +17% annualized while the hedge-fund-strategy ETFs are flat. These numbers look bad…really bad.

However, one reader—BlackDragonFund—posted a pertinent comment on our earlier article:

YOUR CASE THAT THE HEDGIE ETFS FALL SHORT IS NOT PERSUASIVE…THE REAL QUESTION IS, HOW HAVE THEY DONE RELATIVE TO REAL HEDGE FUNDS…WE KNOW (ACCORDING TO YOUR DATA) THAT HEDGE FUNDS IN THE LONG RUN OUTPERFORM THE MARKET, BUT WHAT IF THE HEDGIES OVERALL JUST HAPPEN TO BE LAGGING THE MARKET FOR THE PAST COUPLE OF YEARS? IF THAT IS HAPPENING, THEN THE ETFS ARE FAITHFULLY MIRRORING A STRATEGY THAT IN THE LONG RUN IS STILL LIKELY TO PAY OFF.

Well…it is the case that hedge funds overall have generally been—uncharacteristically—underperforming the market for the past year or two. So we went back and checked to see how each ETF was doing relative to its appropriate hedge fund forbears. We again used the Greenwich Alternative Investments data, which include historical performance for hedge funds following several disparate strategies.

ETF—30 Mar 12 Symbol Inception CAGR Pertinent GAI Category GAI CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% Greenwich Global Long/Short Equity Group Index 4.75% 1
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% Greenwich Global Macro Index 4.37% -0
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% USA Inflation Rate 2.48% -1
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% Greenwich Global Equity Market Neutral Index 0.89% -2
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% Greenwich Global Multi-Strategy Index 7.47% -3
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% Greenwich Global Merger Arbitrage Index 5.88% -5
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% Greenwich Global Merger Arbitrage Index 6.78% -5
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% Greenwich Global Merger Arbitrage Index 4.51% -6
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% Greenwich Global Long-Short Credit Index 4.96% -7
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% Greenwich Global Futures Index -2.56% -8
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% USA Inflation Rate 2.23% -8
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data, GAI for hedge fund index performance data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • Pertinent GAI Category = the Greenwich Alternative Investments hedge fund index most closely related to that ETF
  • GAI CAGR = annualized ROI of that GAI hedge fund index since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the pertinent GAI hedge fund index and each hedge-fund ETF since its inception (the higher, the better for the ETF)

OK then. These results are still not good, but they are no where near unmitigated-disaster territory. On average, the real hedge funds are up about 4% on an annualized basis compared to the flat performance, on average, of the hedge-fund-strategy ETFs. One of the eleven ETFs is actually beating the real hedge funds and two more are just narrowly behind: less than a percentage point.

It is still very early in the game. Even the 24 years of hedge fund performance data we have is not a lot (although it is more than enough to be confident that the 13%-to-7% performance advantage hedge funds have over the market is statistically significant); the oldest of these ETFs has been around barely three years. So while these preliminary data are not very encouraging, it’s definitely too soon to write off the hedge-fund-strategy ETFs as a definitive failure.

Indeed—though it is rank speculation at this early juncture—if the ETFs continue to trail the real hedge funds by an average of 4% on an annualized basis, and the real funds rebound to their historical average outperformance versus the market of around +6%, that implies that the ETFs, even though they are egregiously lagging the market so far, would have a reasonable chance to outperform by +2% or so in the fullness of time.

As we observed last month, investors have pretty much been indifferent to the advent of these new hedge-fund-strategy-based ETFs. None of them have attracted anywhere near $1 billion of investment dollars or serious trading volume. But in the long run, if they can stick so close to their rich uncles, while they are not likely to attract attention from the 1%—or make you rich—they could eventually constitute a decent enough alternative to be worthy of legitimate consideration by long-term investors.

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