Okay, so ETFs got a bit over-specialized. And they didn’t hold up so well during the “Dubai Debacle” in mid-November. But now, manufacturers are betting on active management with a side of hedge fund strategy to mitigate risk. Hedge funds and mitigating risk; two terms not heard in a while.
The IQ ARB Merger Arbitrage ETF began trading late in 2009. According to the Wall Street Journal, rather than hiring traders to sift through deals and choose which to bet on, the ETF relies on a fixed rule book. The main requirement is hardly selective: An acquirer must have offered a premium to a target company’s market price.
“Could that simplicity pay? The ETFs manager says its formula would have generated an 18.7 percent return before fees had it been active in the nine months through September. Merger arbitrage funds as a whole were up less than 10 percent in that time, according to Hedge Fund Research.
“But 2009 has seen few M&A deals collapse, the market overall has risen, and the ETF doesn’t have all the tools hedge funds use to navigate turbulent times. For one thing, the ETF usually takes new positions just once a month, meaning it could miss the juiciest part of a trade.”
And one other attraction; low fees. They’re just 0.75 percent this year compared with the 20 percent hedge funds take off the top.
Will boomers bite? We’ll keep you posted.