JP Morgan targets hedge fund strategies in first active ETF launch

Sep 15th, 2016 | By | Category: Alternatives / Multi-Asset

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JP Morgan Asset Management has introduced its first alternative and actively managed exchange-traded fund. The JP Morgan Diversified Alternatives ETF (NYSE: JPHF) provides investors with diversified exposure to hedge fund strategies including equity long/short, event driven and global macro strategies.

JP Morgan targets hedge fund strategies with first active ETF launch

Robert Deutsch, Global Head of ETFs for JP Morgan Asset Management.

JPHF aims to ‘democratize’ hedge fund investing, which has typically only been available to certain accredited investors, by providing institutional quality hedge fund strategies in a cost efficient, tradeable ETF wrapper.

The fund has been designed to serve as a core component of a portfolio’s alternatives allocation.

Robert Deutsch, Head of ETFs for JP Morgan Asset Management, commented: “In the past, alternative investments have been an exclusive option only accessible by a small portion of investors; however, JPHF now makes these investment vehicles available to a wider array of investors. Alternative beta strategies provide investors with true diversification with attractive liquidity, transparency and cost.”

The fund is managed by Yazann Romahi, Global Head of Quantitative Beta Solutions at JP Morgan Asset Management, whose team manages over $3.5bn of assets in alternative beta solutions.

It employs a rules-based bottom-up approach which, according to JP Morgan, results in a purer capture of the hedge fund exposure and better diversification than traditional hedge fund replication strategies due to lower correlations with traditional markets.

“Since 2005, we’ve had a team dedicated to researching and developing a leading alternative beta capability and we are thrilled to adapt this strategy for a new investment wrapper,” said Yazann Romahi. “JPHF helps to increase diversification, reduce overall portfolio volatility and deliver higher portfolio risk-adjusted returns.”

The ETF plans to utilize a combination of three hedge fund strategies to generate return: equity long/short, event-driven, and global macro strategies.

Managers using equity long/short strategies would attempt to capture alpha by establishing long positions in stocks believed to be undervalued or sell short stocks believed to be overvalued. Generally, managers tend to establish a net long position in the equity market when adopting this approach. Leverage may or may not be used.

Event-driven investing seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as an earnings call, bankruptcy, merger, acquisition, or spinoff.

Global macro funds invest in stocks, bonds, currencies, commodities and derivatives to place directional bets on the prices of underlying assets based on the overall economic and political views of various countries, or their macroeconomic principles.

The ETF has a total expense ratio (TER) of 0.85%.

The fund will compete with several alternative ETFs in the US targeting hedge fund exposure. The largest of these is the IQ Hedge Multi-Strategy Tracker ETF (NYSE: QAI), which diversifies its exposure across numerous types of strategies including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. The fund tracks the IQ Hedge Multi-Strategy Index, has over $1.1bn in assets under management (AUM), and a TER of 0.75%.

European investors looking for a hedge fund ETF have two options available to them: The $250m db x-trackers Hedge Fund Index UCITS ETF (LON: XHFD), which tracks an in-house index of hedge fund strategies including equity long/short, event-driven, global macro and credit (TER 0.90%), or the $32m UBS ETF HFRX Global Hedge Fund Index UCITS ETF (LON: UC19), which tracks the HFRX Global Hedge fund Index, representing the performance of 39 hedge funds covering a variety of strategies (TER is just 0.34%).

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