ETFtrends.com — ETF Trends — Mon Jan 26, 8:00AM CST

Article Comments (0)

Many are familiar with traditional beta-index exchange traded funds that passively track prominent benchmark indices. However, as the industry continues to expand, retail investors can now track alternative investment styles and even tap into strategies previously limited to large hedge funds.

For instance, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI ) is the largest hedge-fund strategy ETF that has been trading since March 2009. QAI is tries to reflect the performance of a customized index that tracks the risk-adjusted return characteristics of hedge funds, writes Corey Hoffstein of Newfound Research for Forbes .

ETF investors may also find other so-called hedge fund replication funds, such as the more recently launched ProShares Hedge Replication ETF (NYSEArca: HDG ) ,

On the other hand, investors can take a broader approach to investing in alternative assets. For instance, the PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT ) and ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS ) employ a range of alternative strategies to enhance risk-adjusted returns when added to a traditional stock and bond portfolio. Specifically, ALTS includes exposure to long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread. The actively managed LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities.

Looking at the multitude of ETF options, investors are spoiled for choice. Hoffstein, though, suggests tarting off with the replicator HDG and supplement an alternative investment portfolio with something like the multi-strategy LALT, which offers strategies offered nowhere else, such as volatility risk premium and forward rate bias.

Additionally, Hoffstein suggests building out the portfolio with satellite positions, or smaller tilts, toward Index IQ Merger Arbitrage ETF (NYSEArca: MNA ). ProShares RAFI Long/Short ETF (NYSEArca: RALS ) and WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI ). Combined, he argues that the different ETF strategies can add a diversified absolute return profile over time, which would help diversify away from traditional equity and fixed-income allocations.

Lastly, the QuantShares U.S. Market Neutral Anti-Beta Fund (NYSEArca: BTAL ) may be used to further hedge equity correlation, which would help a portfolio during significant downturns.

Consequently, the suggested alternative ETF portfolio looks something like a 25% HDG, 25%, LALT, 25%, BTAL, 8.3% WDTI, 8.3% and 8.3% RALS. Hoffstein argues that using these alternative ETFs helps investors invest like a hedge fund would while diminishing the idiosyncratic risks of investing in a single hedge fund.

For more information on hedge-fund-esque strategies, visit our hedge fund category .

Max Chen contributed to this article .

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.