Analyse: db x-trackers db Hedge Fund Index UCITS ETF

Hedgefonds haben zwar seit Jahren keinen guten Lauf, zeichnen sich aber durch niedrige Volatilität aus. Dieser ETF bietet liquiden Zugang zu Managern von der Plattform der Deutschen Bank.

Rolle im Portfolio

The appeal of hedge fund strategies is that they seek to produce uncorrelated returns, making them a potential portfolio diversifier. To this effect, the db x-trackers Hedge Fund Index has had a solid track record. According to Deutsche Bank data, the index posted annualised returns of 0.27% for the five year period ending 28 February 2013. This significantly lags respective performances of 1.75% and 4.94% for the MSCI World and S&P 500 total return indices over this same period. However, the index achieved these returns while exhibiting a level of volatility similar to treasury securities and representing a fraction of that experienced in commodity and equity markets. Add in low correlations with most broad asset classes and the index (and, by proxy, the ETF) has the potential to be a solid diversifier comprising a small portion of a balanced asset allocation.

Compared to a direct hedge fund investment, this ETF is ultra liquid. Many hedge fund investors who tried to pull their investment during the market malaise in 2007-2008 had invested with managers that had reserved the right to suspend redemptions or had pre-specified lock-up periods. An ETF boasting intraday liquidity is an attractive alternative to those fretting over such barriers to entry and exit.

An investment in this ETF is not for everyone. On the plus side, it offers easy access to a strategy that has proven its worth as a diversifier in a balanced portfolio. On the minus side, it is costly and lacks the level of transparency that is one of the hallmarks of the ETF category. Ultimately, we think that this fund can play a steady role in a balanced portfolio for those willing to accept its cost, risks and limitations.

Fundamentale Analyse

The crux of most hedge fund strategies is to generate absolute returns across the full spectrum of market conditions. As such, an effective hedge fund strategy will exhibit low or even negative correlations with other asset classes. Each of the sub-strategies represented in the DB Hedge Fund Index attempts to generate these sorts of returns in distinct ways.

Adherents to an equity hedge (also known as long/short) strategy will take both long and short positions--predominantly in equity securities. Managers will actively seek to minimise volatility by attempting to eliminate non-diversifiable (market) risk--or beta-- from their portfolios. They will subsequently seek to generate alpha in a variety of ways and may employ leverage in doing so. This is the most commonly used strategy amongst hedge fund managers, and as such, the equity hedge sub-index also has the largest weighting in the DB Hedge Fund Index.

Event driven hedge fund strategies represent a bit of a catch-all category. These strategies look to exploit “special” situations such as spin-offs, mergers, liquidations, issuance of securities or bankruptcies. These opportunities are increasingly sought after; a development which could limit their return potential in the future as an increasing number investors competes over a finite set of opportunities.

Credit and convertible strategies seek to invest in mispriced debt securities in light of potential changes to their credit ratings and exploit spreads between an issuer’s convertible debt instruments and their common equity. Managers investing in distressed debt securities may take an active role in working to improve an issuer’s creditworthiness. Meanwhile, many convertible strategies typically involve the simultaneous purchase of an entity’s convertible instruments and short sale of its common stock in order to exploit potential mispricing between the two. Much like the special situations mentioned above, credit and convertible strategies have become increasingly popular amongst hedge fund managers, a phenomenon which could potentially diminish the expected returns to this strategy in the future.

Systematic macro strategies employ mathematical models to identify trending patterns or momentum in the market. These strategies tend to be quantitative, rules-based methods and will often span across multiple asset classes.

Market neutral strategies are similar to the aforementioned equity hedge strategy in that they seek to eliminate a specific form of market risk. In doing so, the goal is to exhibit zero correlation with the targeted source of risk. Market neutral strategies will tend to have no greater than 20% net long or short exposure at any given time. This strategy can be employed across a number of asset classes.

It is important to note that the cross-correlations amongst these seemingly distinct strategies has approached 1 over the past two decades as an increasing number of hedge funds have sought to use similar strategies across what is often a limited set of opportunities. As mentioned above, this phenomenon could serve to ultimately erode the potential diversification benefits of a broad hedge fund strategy such as that represented by this index over time.

Indexkonstruktion

The db Hedge Fund Index is comprised of five separate indices that each track common hedge fund strategies: equity hedge, market neutral, event driven, systematic macro, and credit & convertible. The broad index weights these five sub-indices according to industry-level allocations based on data from Hedge Fund Research Inc. and re-balances quarterly. At the sub-index level, each category has a minimum of five component hedge funds that adhere to that particular sub-index's strategy, the funds are equally weighted within the sub-index and also rebalanced on a quarterly basis. This structure provides diversification across strategies and managers, making the index less susceptible to bad bets by an individual fund or within a given broad strategy. While db X-trackers provides full detail on how the index is constructed and works closely with authorised participants to ensure that tracking error on the secondary market is minimised, this fund will never be nearly as transparent as the vast majority of its ETF brethren. Investors will never know on a security-by-security basis exactly what the index's constituents might be. Full transparency is one of the hallmarks of the ETF category and will inevitably be lacking here.

Fondskonstruktion

The db x-trackers Hedge Fund Index ETF uses synthetic replication to give its owners exposure to the performance of the db Hedge Fund Index. To achieve this return, the fund invests in a fully-funded swap with its parent company Deutsche Bank. Under this swap agreement, the proceeds of fund holders’ investment in the ETF are transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, db X-trackers requests that Deutsche Bank post collateral in a segregated account with the custodian State Street Bank Luxembourg in Deutsche Bank’s name of and pledged in favor of the fund. As of writing, the collateral is comprised of equities of OECD countries and corporate bonds. The company applies haircuts to the collateral’s market value (7.5%-20% for equities, 10% for corporate bonds), which results in overcollateralisation of the fund’s NAV. The fund doesn’t engage in securities lending. Collateral is reviewed daily by third party State Street Global Advisors (SSgA) and if the marked-to-market value of the collateral falls below 107.5% of the NAV (assuming equity collateral), SSgA will ask the swap counterparty for additional collateral to be posted to ensure that net counterparty exposure remains negative at the end of any given day. It is important to note that the index’s performance is measured net of the fess charged by its constituent hedge funds. These fees will typically include a 2% annual levy on assets under management and a 20% cut of any positive performance (often referred to as “two and twenty”). The fund is available in five distinct currency denominations: Euros, U.S. Dollars, Pounds Sterling, Japanese Yen and Swiss Francs. The index is most closely associated with the USD. The other currency versions use monthly rolling currency forwards to hedge against movements in the USD.

Gebühren

The ETF charges investors a total expense ratio (TER) of 0.90%. While at first blush this may seem like a steal, it is important to understand that the returns on the underlying index are net of the component funds' fees, which for a typical hedge fund can include a 2% annual charge on assets under management and a 20% cut of any positive performance. Thus, the explicit costs borne by ETF investors (bid/offer spreads, trading commissions, the TER) reflect just a small portion of the true price of admission to what is a costly underlying investment strategy.

Alternativen

The chief differentiating factor between db X-trackers Hedge Fund Index ETF and a direct hedge fund investment is liquidity. In this regard, the ETF beats a direct hedge fund investment by a mile.

There are other options available for investors for direct access to hedge fund strategies through the more liquid ETF wrapper. Marshall Wace MW TOPS Global Alpha Index ETF and Qbasis Futures Fund ETF both offer investors access to hedge fund strategies in exchange-traded form. Each of these funds follows strategies that are very different from the broad multi-strategy approach on offer from db X-trackers.

There are also hedge fund "replicators" available in an ETF wrapper. Hedge fund replicators rely on the concept of “hedge fund beta”. This is the idea that a substantial portion of hedge fund returns can be explained by exposure to certain market factors (or “betas”), such as movements in the US equity market or exchange rates, rather than individual manager skill (or “alpha”). Hedge fund replicators seek to reproduce this hedge fund beta in a relatively liquid, transparent and cost efficient manner by investing in a set of rules-based strategies based on liquid underlying assets. ETFs offering access to such strategies are available from Source (Source B of A ML Hedge Fund Factor Euro ETF) and Goldman Sachs (Goldman Sachs Absolute Return Tracker Index ETF Portfolio).

 

Über den Autor

Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.