The funds use a variety of strategies to track the hedge fund universe. The IQ funds study the performance of hedge funds. The company assembles a portfolio of ETFs that has the same investment characteristics as the hedge fund universe.

Each month the portfolio is tweaked to keep pace with changes in hedge funds. IQ Hedge Multi-Strategy currently has most of its assets in bonds.

The fund has 21% of assets in iShares iBoxx Investment Grade Corporate Bond ( LQD) and 11% in Vanguard Total Bond Market ( BND). The fund is short euro futures.

IQ Hedge Multi-Strategy tracks a broad universe, following funds in areas such as fixed-income arbitrage and long-short equity. IQ Hedge Macro Tracker only follows macro funds, which can invest around the world, trading currencies one month and emerging market stocks the next.

At the moment the macro fund has big stakes in foreign stocks and currencies. The portfolio has 12% of assets in Vanguard MSCI Emerging Markets ( VWO) and 6% in PowerShares DB G10 Currency Harvest ( DBV).

ProShares Hedge Replication holds individual stocks and derivatives such as futures. The fund currently has a big stake in derivatives that track the Russell 2000 small-cap benchmark. The fund is short the Euro.

Among the most cautious of the replicators is Natixis ASG Global Alternatives ( GAFAX), a mutual fund. While the fund aims to track the broad hedge fund universe, the portfolio departs from the benchmark during periods when market volatility exceeds certain levels. The aim is to limit risk in downturns and protect against big losses.

The strategy passed a difficult test in the turmoil of the fourth quarter of 2008. While the S&P lost 21.9% during the period, Natixis only lost 2.7%. "When volatility soared, we cut our exposure to stocks, and that helped to reduce the losses dramatically," says Jerry Chafkin, CEO of AlphaSimplex, portfolio manager of the Natixis fund.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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