Submitted by theStockMasters. on Sat, 03/28/2009 — 18:28

Don’t have enough ways to lose or burn your money? Here’s a new one, the IQ Hedge Multi-Strategy Tracker ETF (NYSE:QAI) which launched this past week. The ETF will not invest in hedge funds.  Instead, it will invest in other ETFs with the intent of overcoming many of the drawbacks of traditional hedge fund investing.  IndexIQ states that using an ETF-based approach will allow QAI to provide intra-day liquidity, portfolio transparency, lower fees than the typical hedge fund, and the elimination of manager-specific risk.  Bring the matches, this sounds like fun.

Thanks to Ron Rowland for putting this article together. let’s get to the new ETF, according to Ron, he likes the ETF:

Although the stated intent of QAI is to replicate the performance of the hedge fund universe, there are many strategies employed by hedge funds that cannot be duplicated with the current universe of ETFs.  For example, most event-driven strategies, such as merger arbitrage, require taking positions in individual securities.  Convertible arbitrage is another example of a hedge fund strategy that cannot be implemented using just ETFs.

The underlying index, and therefore the ETF, is reconstituted on a monthly basis.  While this is more frequent than most ETFs, it is not the same flexibility that hedge fund managers enjoy.  Additionally, while QAI will have the built-in tax efficiency provided by the ETF structure, these monthly changes to the holdings will likely result in larger distributions than the more common passive ETFs produce.

IndexIQ also states that this offering eliminates manager-specific risk.  Perhaps that is true in a sense, given that the job of the underlying ETF managers is to track an index.  On the other hand, each ETF holding does indeed have a manager, and therefore such risk is still present.  The recent problems surrounding the premiums and bid/ask spreads of the Credit Suisse ETNs and the bankruptcy of the Lehman ETNs are just two examples.  Furthermore, IndexIQ is now a source of manager-specific risk because they designed the index, the methodology, and manage the implementation.

Caveats aside, this is likely to be one of the best new offerings of 2009.  It is an ETF that certainly deserves consideration.  I know that I will be monitoring its progress.

The Masters are inclined to stay on the sidelines and watch the QAI trade for a few weeks, after all, we’ve got better things to do like experiment with burning money, check it: