Market Neutral ETF Might Be Launching at Just the Right Time

NEW YORK ( TheStreet) -- After a long hiatus from product launches, Index IQ has come out with another hedge fund replicator fund with the IQ Hedge Market Neutral Tracker ETF ( QMN).

Like many alternative investment funds the big idea is to have a low correlation to broad indexes like the S&P 500 and more importantly to deliver a consistent return regardless of what the broad market is doing at any given time.

The fund will combine strategies from various, undisclosed market neutral hedge funds and express the exposures that those hedge funds hold with exchange traded funds. The prospectus is clear to say that the QMN is not a fund of hedge funds it is a fund of ETFs. QMN can be long or short various broad segments of the global equity market, fixed income market and currencies.

The fund's literature is also clear to say that the desired result is to look nothing like the stock market. One way to avoid looking like the stock market is to have very little equity exposure and that is the case with QMN.

It currently has slightly more than 13% in long equities and most of that exposure is in iShares MSCI EAFE Index Fund ( EFA). QMN currently captures a less than 1% short exposure with a long position in ProShares Ultrashort Russell 2000 ( TWM).

The fund's largest exposure currently is in very short term U.S. bonds with four different ETFs totaling 58% of the fund. One segment that appears to be unavailable to the methodology employed by QMN is the commodity market. At times commodities have a very low correlation to equities.

In the last five years as the S&P 500 has declined 6% the SPDR Gold Trust ( GLD) is up 136% and the iShares Silver Trust ( SLV)is up 152%. Five years is a longer timeframe than most hedge funds think about but commodity exposure might be able to enhance the low correlation effect.

The fund factsheet includes information that the index' largest drawdown occurred in 2008 with 6.25% decline versus a 36% decline for the S&P 500. That is encouraging for the next time the stock market goes down a lot.

The three-year annualized return for the index is reported at 4.55% versus 13.61% for the S&P 500. The three-year result could be thought of as discouraging for the next time the stock market is up a lot.

In thinking about the above numbers it is important to remember the objective of the fund. QMN is not supposed to look like the stock market. In the last three and half years the S&P 500 has doubled.

If it doubles again over the next three and half years QMN will not go up anywhere near that much, that is not the investment objective. That the fund came out after the S&P 500 doubled might turn out to be very good timing for the launch.

If QMN performs as hoped for then its role in a portfolio would be in a modest weighting as a portfolio diversifier to hopefully offset the effect that stock market volatility is having on the rest of the portfolio.

At the time of publication the author held GLD as a client and personal holding.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.