ProShares Launches Hedge Fund Replication ETF

ProShares announced the launch of the Hedge Replication ETF (HDG), a new product that will seek to provide returns characteristic of the hedge fund asset class. The new ETF is designed to maintain a high correlation to the HFRI Weighted Composite Index, an equal-weighted composite of more than 2,000 funds.

The new ETF will seek to accomplish its objective by employing a proprietary model to establish weighted long or short exposure to six factors:

• S&P 500 Total Return Index
• MSCI EAFE U.S. Dollar Net Total Return Index
• MSCI Emerging Markets US Dollar Net Total Return Index
• Russell 2000 Total Return Index
• 3-month U.S. Treasury Bills
• ProShares UltraShort Euro ETF

The ETF will rebalance monthly, at which point a systematic regression analysis will determine which weighting for the factors would have produced the strongest correlation with the HFRI benchmark over the previous 24 month period. The S&P 500, MSCI EAFE and UltraShort Euro ETF will be weighted monthly from -100% to 100% based on this analysis. The Emerging Markets component will be weighted from 0% to 100% (i.e., long or flat), while the Treasury Bills factor can be weighted from 0% to 200%. The Russell 2000 factor will be weighted between 100% and -30%. Excluding the Treasury Bills factor, the sum of the factor weights will be between -100% and 100% upon rebalancing.

“Many portfolios could benefit from the risk/return characteristics of hedge funds, but investors often either can’t or don’t invest in hedge funds because of a variety of challenges,” said Michael L. Sapir, chairman and CEO of ProShare Advisors LLC, ProShares’ investment advisor. “We are pleased to offer an ETF that addresses challenges of hedge fund investing and may be, for many investors, an attractive alternative to hedge funds.”

Hedge Fund ETFs

One of the recurring themes in the ETF industry over the last several years has been the democratization of asset classes that were previously either difficult to access or prohibitively expensive and time consuming to maintain for the vast majority of investors. The proliferation of commodity ETPs is perhaps the best example of that phenomenon. But more recently, ETFs offering exposure to alternatives - assets that often exhibit low correlation to traditional asset classes such as stocks and bonds - have become increasingly popular.

There are a number of existing ETPs offering exposure to hedge fund-like strategies. The most popular of those is the IQ Hedge Multi-Strategy Tracker ETF (QAI), an ETF-of-ETFs that constructs a portfolio of various asset classes in an attempt to replicate returns delivered by hedge funds. There are also a number of products offering more targeted exposure to popular hedge fund strategies, including macro, managed futures and merger arbitrage:

• WisdomTree Managed Futures Fund (WDTI)
• Credit Suisse Merger Arbitrage Liquid ETN (CSMA)
• Credit Suisse 2x Merger Arbitrage Liquid ETN (CSMB)
• Credit Suisse Long/Short Liquid Index ETN (CSLS)
• IQ Hedge Macro Tracker ETF (MCRO)
• IQ Merger Arbitrage ETF (MNA)

ProShares is the largest issuer of leveraged and inverse ETFs by total assets, but in recent months the company has made a push toward developing ETFs offering exposure to alternatives. ProShares already offers the only VIX ETFs (VIXY) (VIXM), products that allow investors to bet on swings in anticipated stock market volatility.

HDG will be the third ETF in ProShares “Alpha” suite of ETFs. Existing offering in that category include:

• ProShares Credit Suisse 130/30 (CSM): This ETF offers exposure to a 130/30 portfolio, a strategy that has been around for decades. CSM is designed to offer a risk/return profile generally similar to the S&P 500, but includes both long and short positions. The stocks deemed to be the least attractive are sold short (30% of the portfolio) and the proceeds are used to double down on those stocks deemed to maintain the greatest growth potential. The result of the 30% short and 130% long exposures is a net 100% long portfolio that may be an interesting alternative to products such as SPY.

• ProShares RAFI Long/Short (RALS): This ETF also maintains both long and short positions, but the underlying portfolio is market neutral (meaning the long and short positions are approximately equivalent). RALS is designed to exploit the inefficiencies of market cap-weighting. Sstocks with a RAFI weight that exceeds their market cap weight make up the long position, while those with a market capitalization not justified by the RAFI weight are sold short.

HDG will charge an expense ratio of 0.95%.

Disclosure: No positions at time of writing.

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