A recent study by New York Life highlighted rising interest among institutional investors in alternative ETFs, which can help to reduce fees and offer better liquidity than traditional hedge funds. ETFs have other benefits as well: transparency, flexibility to efficiently increase and decrease target allocations, reduced manager oversight, and reporting simplicity. More broadly, the growth of ETF-based model portfolios on wealth management platforms may drive demand for alternative strategies that have the potential to improve long term returns and protect against drawdowns. What are the issues? The success of most ETFs is due to their ability to provide exposure to a specific asset class or strategy, moreso than the ability of a single manager to outperform an index. This argues for more alternative ETFs that can provide “sector-like” exposure to specific hedge fund strategies, like managed futures and equity long/short – similar to how smart beta ETFs provide exposure to value, momentum and growth. Another issue is efficiency of execution – the ability to buy or sell large quantities of shares at close to NAV – which is dependent on the instruments owned by the ETF itself. Replication-based ETFs that invest in highly liquid futures contracts have the potential to address these issues.
