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By A.J. D'Asaro | 11-12-2014 10:00 AM

A Hedge Fund Approach Without the High Fees

Bronze-rated IQ Alpha Hedge Strategy attempts to capture the tactical asset allocation of hedge funds but at a lower cost.

A.J. D'Asaro: The Morningstar Medalist of the Week is IQ Alpha Hedge Strategy (IQHOX). This is a hedge fund replication fund, which seeks to track the performance of a broad hedge fund index. In this case, it's a set of the Dow Jones Credit Suisse Hedge Fund Indexes.

The theory behind hedge fund replication is that hedge funds, as a whole, don't deliver alpha after fees, which are substantial. So, what this fund attempts to capture is the tactical asset allocation of hedge funds.

In 2008, for example, hedge funds were successful in lurching out of equities before the worst of the crisis. Unlike other competitors, which equal-weight hedge fund indexes and then invest long in those, this fund weights each index based on a momentum strategy, which we think is a slightly better way to approach it. And over the long term this has worked better for investors than its peers.

Investors have two options for investing in this strategy. They can invest in the mutual fund or they can invest in this company's ETF, which trades under the ticker symbol QAI. The ETF is a better deal for individual investors because it trades at a lower expense ratio than the investor shares.

This fund isn't a core holding, but it can act as a great portfolio diversifier and risk reducer in investor portfolios.

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