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Hedge Fund 'Clones' Outperform The Real Thing

Thursday, 1 Sep 2011 | 4:14 PM ET

A hedge fund replication exchange-traded fund , designed to mimic the performance and exposure of the hedge fund industry, was one of the more resilient investments in August, outperforming broader markets—including hedge funds.

Index IQ’s flagship ETF, the IQ Hedge Multi Strategy ETF survived a turbulent month to finish just 1.2 percent lower, well above the S&P 500 which fell more than 5 percent over roughly the same period. The ETF also outpaced the broader hedge fund industry, which saw flagship funds for large asset managers like John Paulson and Bill Ackman suffer major losses.

As an asset class, hedge fundslost nearly 4 percent through late August, according to Hedge Fund Research index data.

Adam Patti, the CEO of IndexIQ and creator of the QAI, credits the month’s performance to the overall strategy of the ETF, which is designed to limit investment losses during times of market turmoil.

“There are 2 ways to outperform the market—you can outperform on the upside or the downside,” Patti told CNBC in a phone interview. “If the market goes straight up, we’re not going to keep up, but as we’ve seen the volatility is just tremendous … we could see a 5 percent correction tomorrow.”

Patti says investors added about $1.2 million to the QAI in August, a relatively small sum, but a stark contrast compared to other asset classes like mutual funds, which suffered about $30 billion in withdrawals from August 3 through 24, according to the Investment Company Institute.

Hedge fund replication, the concept on which Patti’s ETF is based, was born out of the idea to create an investable “clone” of a hedge fund portfolio that mimics the latter's volatility and performance characteristics, typically by investing in other ETFs and various asset classes.

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