HFND: Fascinating Idea However Wait For Extra Information

The Limitless HFND Multi Technique Return Tracker ETF (NYSEARCA:HFND) goals to provide retail traders entry to hedge fund funding kinds by way of its proprietary machine studying funding course of that goals to copy the gross returns of the hedge fund trade.

Whereas the idea is intriguing, I’ve reservations concerning the execution as particular person hedge funds will be very numerous. I concern HFND will find yourself replicating the ‘common’ of every fashion, which can turn into very mediocre returns as a result of regulation of huge numbers.

Fund Overview

The Limitless HFND Multi Technique Return Tracker ETF is an actively managed ETF that goals to copy the hedge fund trade’s gross of charges returns. HFND is a brand new ETF launched in October 2022, so it has restricted returns historical past. HFND costs a 1.03% expense ratio.

Technique

The HFND ETF goals to copy the hedge fund trade’s gross returns by way of a proprietary machine studying algorithm that creates a portfolio that greatest matches the newest month’s returns (return, volatility, correlation with different asset courses) for numerous hedge fund kinds: lengthy/quick fairness, world macro, event-driven, mounted revenue arbitrage, rising markets, managed futures, and multi-strategy. The funding supervisor, Limitless Funds, Inc. (“Supervisor”) achieves its goal by taking lengthy and quick positions in broad-based ETFs and futures contracts.

Intriguing Funding Course of

First, the supervisor obtains publicly reported returns and price knowledge for the hedge fund trade, together with these for the person hedge fund kinds talked about above. Subsequent, for every fashion, the supervisor determines a portfolio of 10-20 positions that greatest matches the fashion’s reported gross returns traits. The supervisor then aggregates the fashion positions leading to a complete hedge fund trade mannequin. The fashion portfolios are weighted based mostly upon the relative asset ranges of every fashion based mostly on publicly reported knowledge. Typically, the ensuing portfolio will include 30 to 50 positions.

Over time, the supervisor expects this machine studying portfolio will generate returns that approximate the hedge fund trade’s gross returns such that the HFND ETF will outperform the hedge fund trade on a internet of charges foundation.

What the HFND ETF won’t do is put money into hedge funds immediately or replicate the direct underlying holdings of particular person funds. The HFND ETF will even not have interaction in the usage of extreme leverage or have a big share of property invested in illiquid investments.

Bridgewater Pedigreed Supervisor

The HFND ETF is managed by Bob Elliott, a frequent visitor of many monetary podcasts and a ‘fintwit’ personality with greater than 50k followers. Mr. Elliott is a former member of the Funding Committee at Bridgewater Associates, the firm based by Ray Dalio which manages greater than $140 billion in hedge fund property. Mr. Elliott is the CEO and CIO of Limitless, and has greater than two 2 many years of expertise constructing funding methods together with for Bridgewater’s Pure Alpha fund.

Portfolio Holdings

Determine 1 exhibits the HFND ETF’s present holdings. The fund has 28% of property held in money, and 14% invested in mid-cap equities and 12% invested in world equities. It is usually lengthy mortgage backed securities (9%), company bonds (7%), and rising market shares (7%). The ETF is brief expertise shares (-5%), long-term treasuries (-4%), and TIPS bonds (-3%).

Returns

With solely 3 months of working historical past, it is just too quickly to evaluate HFND’s efficiency. The HFND ETF was down 2.1% in December, however up 2.1% since its October inception to December 31, 2022 (Determine 2).

YTD to January 25, 2023, the HFND ETF is up 3.1% (Determine 3).

Distribution & Yield

The HFND ETF paid a token distribution of $0.0875 in December. Based mostly on accessible disclosure, it’s unclear whether or not this can be a periodic distribution or a particular year-end distribution. Because the HFND ETF holds some mounted revenue bond funds, it’s attainable for the fund to pay a daily distribution funded by funding revenue. Nevertheless, hedge fund methods have a tendency to not be excessive yielding investments, so traders shouldn’t get their hopes up.

Intriguing Idea However The Proof Will Be In The Pudding

The HFND ETF has an intriguing idea of utilizing machine studying to copy the exposures of hedge fund kinds with out investing within the precise underlying investments. Nevertheless, one phrase of warning is that HFND’s strategy could solely replicate the ‘common’ fund efficiency inside every technique.

Hedge funds are notoriously eclectic and numerous, so the returns distribution inside every technique class will be huge. For instance, in line with a current Monetary Occasions article, macro hedge funds had a stellar 2022, as volatility in commodities and glued revenue allowed astute managers to make large returns. Chris Rokos of Rokos Asset Administration reportedly gained 45.5% in 2022, whereas Caxton Associates’ Macro fund gained 30.2% to mid-December.

Nevertheless, if we take a look at the ‘common’ macro fund, as represented by Eurekahedge’s Macro Hedge Fund Index, macro hedge funds misplaced 0.4% in 2022 (Determine 4). So HFND’s strategy could replicate the ‘common’ 2022 return of -0.4% and never a number of the prime performing returns proven within the FT article.

The returns dispersion is even starker for another kinds like Lengthy/Quick Equities. For instance, whereas Eurekahedge’s Lengthy/Quick Index confirmed a 2022 return of -5.1% for the style, precise fund efficiency ranged from Acadian Global Equity Absolute Return Fund’s 29.1% 1 Yr net return to Q2/2022, to growth-focused Tiger Global, which lost 56% in 2022. As soon as once more, if HFND goals to copy the ‘Lengthy/Quick Fairness’ fashion, does it find yourself replicate the ‘common’ of -5.1%?

Because of the regulation of huge numbers, what HFND finally ends up replicating may very well be very mediocre returns over the long-run. For instance, Eurekahedge’s Lengthy/Quick Equities index has returned a cumulative 44.9% since inception in 2008 (Determine 5). This works out to a CAGR return of two.5%.

This compares poorly to an fairness index fund just like the SPDR S&P 500 ETF Belief (SPY), which has delivered 265.8% complete returns in the identical timeframe for a CAGR of 9.0% (Determine 6).

Conclusion

The HFND ETF goals to provide retail traders entry to hedge fund funding kinds like lengthy/quick fairness, world macro, and event-driven through the use of a proprietary machine studying course of to design portfolios utilizing ETFs and futures that replicate every fashion’s return profile. HFND goals to outperform the hedge fund trade general by replicating the varied kinds’ gross returns whereas avoiding the related excessive charges.

Whereas the idea is intriguing, I’ve reservations concerning the execution as particular person hedge funds will be very numerous. Even inside a standard fashion like ‘world macro’, there is usually a big selection of returns distribution, relying on the managers’ talent and luck. What HFND replicates is the ‘common’ of every fashion, which can turn into very mediocre returns as a result of regulation of huge numbers.