📊Hedge Fund Strategies for All: The QAI ETF Story

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Hello, ETF UNO Community! Today, we're exploring the NYLI Hedge Multi-Strategy Tracker ETF $QAI ( ▲ 0.16% ) , which aims to bring hedge fund strategies to everyday investors.

Hedge funds are often seen as complex investment vehicles, typically accessible only to institutional investors and high-net-worth individuals. The QAI ETF aims to change this phenomenon by providing exposure to hedge fund-like strategies without the usual barriers to entry. This analysis could be particularly useful if you want to incorporate alternative investment approaches into your portfolio.

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What is QAI?

The NYLI Hedge Multi-Strategy Tracker ETF, managed by New York Life Investments, was launched in March 2009. It is one of the pioneers in the alternative ETF space. With over a decade of performance history, it provides an interesting case study for alternative strategy ETFs.

QAI seeks investment results that correspond (before fees and expenses) to the price and yield performance of the NYLI Hedge Multi-Strategy Index. This index attempts to replicate the risk-return characteristics of the hedge fund universe, providing investors with exposure to hedge fund-like returns without directly investing in hedge funds themselves.

It's important to clarify that QAI does not invest in hedge funds, or its underlying index includes hedge fund components. Instead, it uses a sophisticated "fund of funds" approach, which invests in various ETFs that aim to achieve performance patterns similar to those of hedge funds.

The fund's core strategy is built around primary hedge fund styles as below:

1. Long/Short Equity - Attempts to capitalise on both rising and falling stock prices

2. Global Macro - Seeks to profit from broad economic trends and geopolitical events

3. Market Neutral - Aims to generate returns regardless of market direction

4. Event Driven - Focuses on corporate events such as mergers and acquisitions

5. Fixed Income Arbitrage - Exploits pricing inefficiencies in the bond market

6. Emerging Markets - Targets opportunities in developing economies

By allocating across these strategies, QAI attempts to provide:

• Lower correlation to traditional markets

• Reduced portfolio volatility

• Potential downside protection during market stress

• Access to sophisticated investment approaches

The ETF's composition is regularly rebalanced to maintain alignment with its target hedge fund characteristics, making it a dynamic investment that evolves with market conditions.

Investment Strategy📈

Understanding where QAI fits within a broader portfolio strategy is crucial for maximising its potential benefits. Here are several approaches to effectively incorporate this alternative ETF into your investment mix:

• 🛰️Core-Satellite Approach: One popular implementation strategy is the core-satellite approach, where you allocate most of your portfolio to core market exposures (typically index funds tracking major markets) while using specialised ETFs like QAI as "satellites" to enhance returns or reduce risk.

• ⤵️Risk Reducer: Given QAI's typically lower correlation to traditional markets, it can function as a volatility dampener in periods of market stress. Allocating about 10% of QAI to the total portfolio creates a "buffer zone" of alternative strategies that may help insulate the portfolio during periods of equity market turbulence.

• 🏋️Barbell Strategy: For more tactical investors, a barbell approach pairs higher-risk growth assets with stabilising alternatives. This creates a portfolio with clearly defined offensive and defensive components. QAI serves as a middle ground that potentially offers moderate returns with a lower correlation to extremes.

When adding QAI to a portfolio, timing deserves consideration:

• 🗻Market peaks: Increasing QAI allocation when traditional markets appear overvalued

• 〰️Volatility spikes: Adding to QAI positions during periods of heightened market uncertainty

• ⚖️Rebalancing trigger: Using deviations from target allocations as automatic signals to adjust QAI exposure

QAI at a glance

ETF Issuer: New York Life Investments (NYLI)

Inception: 2009-03-25

Asset Class: Blend

Underlying Index: NYLI Hedge Multi-Strategy Index (manged by NYLI)

Geographical Focus: Global

Expense Ratio: 0.91% (as of last data point)

Dividend Yield: 2.20%

Distribution Frequency: Annual

Historical Performance

Since its inception, QAI has generally delivered on its promise of providing moderate returns with lower volatility than equity markets:

• Bull Market Performance (2009-2019): During the extended bull market following the Global Financial Crisis, QAI typically underperformed the S&P 500, which is expected for a strategy designed to offer only partial upside capture. However, this period demonstrated that QAI does not maximise returns in strongly trending markets.

• 2015-2016 Market Correction: During this period of energy sector distress and global growth concerns, QAI experienced approximately half the drawdown of the broader equity market.

• Q4 2018 Selloff: When equities dropped sharply in late 2018, QAI demonstrated its defensive characteristics, falling substantially less than the S&P 500.

• 2020 COVID-19 Crash: During the pandemic-induced market collapse, QAI declined alongside other risk assets but recovered more steadily than many conventional investments.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Sophisticated Diversification Beyond Traditional Assets: QAI offers exposure to hedge fund strategies that behave differently from conventional stocks and bonds. It's a fundamentally different approach to generating returns. The ETF's multi-strategy approach combines several hedge fund styles with distinct return drivers.

2. Democratisation of Institutional Investment Approaches: Hedge fund strategies have historically been the exclusive domain of institutional investors and ultra-high-net-worth individuals. QAI eliminates the barriers and allows everyday investors to access investment approaches previously available only to the financial elite.

3. Potential Downside Protection During Market Stress: One of QAI's most compelling attributes is its potential to provide downside protection during periods of market stress. Historical performance during major drawdowns suggests the ETF can help mitigate portfolio losses when conventional assets struggle. QAI offers a strategy historically exhibiting lower maximum drawdowns than broad equity indices.

Top 3 Reasons Not to Invest

1. Complex Structure and Higher Expenses: QAI employs a sophisticated fund-of-funds structure with inherent complexities and elevated costs:

   • QAI's expense ratio is substantially higher than most traditional index ETFs.

   • The fund-of-funds structure creates a layered fee structure, as QAI invests in other ETFs that charge their fees.

   • Higher trading costs due to the dynamic rebalancing of multiple strategies

2. Potential Tax Inefficiency: QAI's active management approach and fund-of-funds structure may create tax considerations that don't affect more tax-efficient index ETFs. While the ETF structure generally offers tax advantages compared to mutual funds, QAI may not deliver the same level of tax efficiency as traditional index-based ETFs that employ minimal trading.

3. Risk of Strategy Drift and Index Construction Limitations: QAI aims to track an index replicating hedge fund returns. However, this approach faces inherent limitations: the index relies on ETFs instead of actual hedge fund holdings, which may not reflect the agility of real hedge fund managers. Its backward-looking approach might overlook emerging strategies, and its effectiveness could decline as markets evolve.

Bringing Hedge Fund Strategies to Your Portfolio🌉

QAI represents a fascinating financial innovation—bringing hedge fund strategies to the ETF structure and making them accessible to everyday investors. After examining its approach, performance history, and the cases both for and against investment, several key conclusions emerge:

1. QAI appears best suited for:

   • Moderate-risk investors seeking to reduce portfolio volatility without fully retreating to cash or bonds

   • Diversification-focused investors looking beyond traditional asset classes

   • Defensive-minded investors concerned about potential market corrections

   • Sophisticated retail investors who understand alternative strategies but prefer the ETF structure

2. Rather than viewing QAI as a standalone investment, it's most effective when thoughtfully integrated into a broader portfolio strategy.

3. QAI reminds us that investment success isn't solely about maximising returns—it's about creating resilient portfolios aligned with specific financial goals. In a world of increasingly correlated traditional assets, alternative strategies like those employed by QAI offer potential paths to improved risk-adjusted returns.

4. While not appropriate as a core holding for most investors, QAI represents an intriguing satellite position that can potentially enhance portfolio characteristics, particularly during challenging market environments.

At ETF UNO, we always encourage you to assess your financial situation, risk tolerance, and investment timeline before considering any investment, including QAI. Gaining a better understanding of alternative strategy ETFs can enhance your investment toolkit and create new opportunities for portfolio construction. Until our next in-depth exploration of ETFs, we wish you thoughtful investing and resilience in your portfolio across all market environments!

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.