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Should You Buy Into Hedge Fund ETFs?

April 25, 2012 – Comments (1) | RELATED TICKERS: ALT , CSM , QAI

Hedge funds were initially developed as an alternative investing method to create absolute returns in terms of alpha. Specifically, alpha measures risk-adjusted return or the return generated by a security, relative to the return you would expect based on its beta. An investment returning more than the return that would be expected based on its volatility is said to generate positive alpha; an investment returning less than its expected return is said to generate negative alpha. In general, hedge funds seek outperformance of a given long-only index benchmark, on a risk-adjusted basis, using limited shorting, derivatives and leverage. With these techniques, hedged portfolios can take advantage of both negative and positive performance expectations for the stocks in their portfolios. Does this strategy actually work when bottled into an ETF?

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