A number of months in the past, I wrote an initiation article on the Limitless HFND Multi Technique Return Tracker ETF (NYSEARCA:HFND). I used to be cautious on the technique, as I feared HFND’s technique of replicating the hedge fund trade’s gross of charges return will find yourself delivering a mediocre product.
With a couple of extra months of efficiency knowledge to investigate, has my view on the HFND ETF improved?
Temporary Fund Overview
First, since HFND is a brand new fund idea, I’ll go over the small print of the technique for readers who usually are not acquainted. The HFND ETF goals to duplicate the gross returns of the hedge fund trade by way of a proprietary machine studying (“ML”) algorithm that makes an attempt to map the newest month’s returns (return, volatility, correlation with different property) of assorted hedge fund types like lengthy/quick fairness, international macro, and event-driven, onto an funding universe of ETFs and futures contracts.
For every hedge fund model, the supervisor feeds publicly reported returns knowledge into its ML algorithm to create a portfolio of 10-20 positions that finest match the model’s reported returns traits. This course of is repeated for all the varied hedge fund types, and the ensuing portfolios are aggregated and netted into an total ‘complete hedge fund trade’ mannequin. Usually, the ensuing portfolio will include 30-50 positions.
Over time, the ‘complete hedge fund trade’ mannequin is anticipated to ship returns that approximate the hedge fund trade’s gross returns. Given HFND’s easy charge construction (0.95% administration charge, 1.03% complete expense ratio), the HFND ETF is anticipated to outperform the hedge fund trade internet of charges.
HFND is managed by Bob Elliott, a frequent ‘fintwit’ character and former government at Bridgewater Associates, one of many largest hedge fund managers on the earth. Mr. Elliott is the CEO and CIO of Limitless, the fund supervisor of HFND, and has greater than two 2 many years of expertise constructing funding methods together with for Bridgewater’s Pure Alpha fund.
HFND Continues To Lag The Fairness Markets…
Since my article, the HFND ETF has delivered -4.0% complete return, considerably trailing the S&P 500 Whole Return Index with 3.6% returns in the identical time-frame, partly justifying my warning (Determine 1).
Nevertheless, because the HFND ETF is geared toward replicating the hedge fund trade, maybe it’s an ‘apples’ to ‘oranges’ comparability to match the HFND ETF to the S&P 500 Whole Return Index.
…Ditto For Eurekahedge…
Sadly, the comparability towards the hedge fund trade can also be unfavourable for HFND. Whereas HFND goals to duplicate the hedge fund trade’s gross returns, it has really lagged behind the trade’s internet returns. YTD to April 30, 2023, the HFND ETF has delivered 0.3% in returns (Determine 2).
Compared, the Eurekahedge Hedge Fund Index, an equal-weighted index of 3137 constituent hedge funds, has returned 2.3% YTD to April 30 (Determine 3).
Actually, evaluating HFND’s 6 month-to-month returns since inception towards the Eurekahedge Hedge Fund Index, we will see that HFND has underperformed the Eurekahedge index 4 out of the 6 months (Determine 4).
After all, 6 months is hardly sufficient knowledge to go judgment, however this has not been a powerful begin for the HFND ETF.
HFND vs. All-Climate And 60/40
One other fascinating evaluation we will carry out on the HFND ETF is to match the ETF towards ‘set it and neglect it’ methods like Ray Dalio’s All-Climate Portfolio or the basic 60/40 portfolio. Since Mr. Elliott is an alumni of Bridgewater, that is an particularly apt comparability.
In Determine 5, we now have modelled the All-Climate portfolio and 60/40 portfolio utilizing 5 easy low-cost ETFs, the Vanguard Whole Inventory Market ETF (VTI), the iShares 20+ 12 months Treasury Bond ETF (TLT), the iShares 7-10 12 months Treasury Bond ETF (IEF), the Invesco DB Commodity Monitoring Fund (DBC), and the SPDR Gold Shares (GLD).
In its quick working historical past, Limitless’s HFND ETF has lagged the 2 basic allocation portfolios by a mile, returning a compounded 0.7% vs. 9.2% for All-Climate and 9.2% for 60/40 (Determine 6).
The HFND ETF additionally has far weaker Sharpe and Sortino ratios in comparison with the asset allocation portfolios. Once more, whereas the dataset has been restricted, the preliminary outcomes haven’t been promising.
The HFND ETF has a noble goal of utilizing machine studying to ‘democratize investing’. Sadly, preliminary efficiency up to now have been very disappointing, with the HFND ETF considerably lagging behind the Eurekahedge Hedge Fund Index and easy asset allocation fashions like Ray Dalio’s basic All-Climate portfolio or the 60/40 portfolio.
I’ll proceed to trace the efficiency of the HFND ETF and hopefully Mr. Elliott can turnaround the fund’s efficiency. Nevertheless, for now, I consider traders would positively keep on the sidelines on this ETF idea.