I nvestors seeking access to the benefits of diversification and exposure to alternative allocations that hedge funds bring may be able to meet their needs via IQ Hedge Multi-Strategy Tracker (ARCA:QAI ). The exchange traded fund provides the possibility of owning alternative investments without having the necessary know-how of active investment, and at about half the volatility of the S&P 500 index.

Hedge funds are designed to hedge, said Adam Patti, founder and CEO of IndexIQ. They provide low volatility and diversification to your portfolio: dampen the downside, yet retain that upside potential when the market goes up.

The ETF replicates six of the largest hedge fund strategies: long-short equity, fixed-income arbitrage. global macro, emerging markets, event-driven and market-neutral.

It’s really a synthetic hedge fund of funds, said Patti. QAI is an easy way to gain exposure to the overall hedge-fund market risk-return profile. So it’s like the S&P 500 of the hedge-fund market.

The fund was launched in 2008 and now has just under $1 billion in assets. It’s produced an average annual return of 3.60% the past three years vs. 18.03% for the S&P 500, a proxy for the broad stock market .

It seeks to identify indexes that have the most favorable 12-month return momentum among the six Dow Jones Credit Suisse Hedge Fund Strategy Indexes. As a result, its asset allocation can vary significantly depending on the momentum signals generated from its quantitative model.

It’s a very defined index methodology, said Patti. Every month it changes. It changes based on what the hedge fund managers are doing, so it’s very dynamic.

Each month, the index will reallocate among those six strategies, with a one-month lag. From 2009 to 2014, it had about 80% in fixed income, such as Treasury, high yield. investment grade, floating-rate, international and convertible bonds. About 20% was invested in equities, 3% in currencies, 2% in commodities, and it shorted 6% in REITs.

Top Holdings

As of March 5, QAI’s top ETF holdings were Vanguard Total Bond Market (ARCA:BND ), Vanguard Short-Term Bond (ARCA:BSV ), PowerShares Senior Loan (ARCA:BKLN ), iShares Russell 2000 Growth (ARCA:IWO ) and iShares Core U.S. Aggregate (ARCA:AGG ).

By sector, its stock portfolio is invested roughly 16% in technology. 15% in health care, 13% in consumer cyclical, 12% in industrials and 12% in financials.

Patti recommends using the fund as a fixed-income alternative. Given the huge run-up in fixed-income prices that we’ve seen over the last several years, what’s worrying advisers is ‘what if rates rise’ and at some point rates are going to rise. What happens to your fixed income is that fixed-income prices will fall off a cliff.