Key Takeaways
- • Global macro and multi-strategy alternative ETFs, led by IQ Hedge Macro Tracker ETF (MCRO) and IQ Hedge Multi-Strategy Tracker ETF (QAI), reversed 2016's weak performance to rank at the top of 2017 returns when measured by risk-adjusted Sharpe ratios, primarily due to lower volatility across the board.
- • Volatility compression dominated alternative investment performance in 2017, with standard deviation in monthly returns shrinking 44 percent year-over-year across all tracked strategies, fundamentally reshaping risk-adjusted return profiles.
- • Alternative investments failed to deliver market-beating gross returns in 2017 for the first time in the review period, with only MCRO's risk-adjusted Sharpe ratio exceeding the SPDR S&P 500 ETF (SPY) after accounting for risk.
- • The defining feature of alternative investments—historical uncorrelation to equity markets—proved largely ineffective in 2017, with top-performing alternative ETFs becoming increasingly aligned with broad equity market movements rather than providing portfolio diversification benefits.
- • Performance rankings were determined using Sharpe ratios rather than gross returns to standardize comparisons across different alternative exposures, reflecting the growing emphasis on risk-adjusted metrics for institutional portfolio construction.
Summary
Alternative investment ETFs experienced a notable performance reversal in 2017, with strategies that underperformed in 2016 emerging as leaders when evaluated on a risk-adjusted basis. The IQ Hedge Macro Tracker ETF (MCRO) and IQ Hedge Multi-Strategy Tracker ETF (QAI)—both of which ranked among the weakest performers in 2016—ascended to the top positions in 2017, primarily driven by dramatically reduced volatility across the alternative investment landscape.
The most striking characteristic of 2017's alternative investment performance was the substantial compression of volatility. Standard deviation in monthly returns declined by 44 percent across all tracked alternative strategies compared to the prior year. This widespread reduction in return volatility created a tailwind for many funds, improving risk-adjusted metrics across the board even where gross returns remained modest.
Despite the favorable volatility environment, alternative investments failed to generate gross returns exceeding the broad equity market in 2017, marking a departure from 2016 when multifactor and value strategies outpaced the S&P 500 on a pre-adjustment basis. However, when accounting for risk, the MCRO fund's Sharpe ratio exceeded that of the SPDR S&P 500 ETF (SPY), demonstrating the growing importance of risk-adjusted performance metrics in evaluating alternative strategies.
A significant challenge emerged regarding the fundamental value proposition of alternatives. The uncorrelation to equity markets—traditionally the core rationale for alternative investment allocation—essentially failed to materialize in 2017. The year's highest-ranked alternative ETFs exhibited substantial alignment with broad equity market movements, undermining their traditional role as portfolio diversifiers. This development suggests that investors should reassess whether alternative ETFs are delivering the decorrelation benefits that justify their allocation within institutional portfolios.
The performance analysis employed Sharpe ratios rather than gross returns for fund rankings, reflecting institutional best practices in evaluating risk-adjusted returns for portfolio construction purposes. This methodology places all alternative exposures on comparable footing, though it requires investors and advisors to conduct supplementary analysis of individual fund offerings to determine suitability for specific portfolio objectives.
The most striking characteristic of 2017's alternative investment performance was the substantial compression of volatility. Standard deviation in monthly returns declined by 44 percent across all tracked alternative strategies compared to the prior year. This widespread reduction in return volatility created a tailwind for many funds, improving risk-adjusted metrics across the board even where gross returns remained modest.
Despite the favorable volatility environment, alternative investments failed to generate gross returns exceeding the broad equity market in 2017, marking a departure from 2016 when multifactor and value strategies outpaced the S&P 500 on a pre-adjustment basis. However, when accounting for risk, the MCRO fund's Sharpe ratio exceeded that of the SPDR S&P 500 ETF (SPY), demonstrating the growing importance of risk-adjusted performance metrics in evaluating alternative strategies.
A significant challenge emerged regarding the fundamental value proposition of alternatives. The uncorrelation to equity markets—traditionally the core rationale for alternative investment allocation—essentially failed to materialize in 2017. The year's highest-ranked alternative ETFs exhibited substantial alignment with broad equity market movements, undermining their traditional role as portfolio diversifiers. This development suggests that investors should reassess whether alternative ETFs are delivering the decorrelation benefits that justify their allocation within institutional portfolios.
The performance analysis employed Sharpe ratios rather than gross returns for fund rankings, reflecting institutional best practices in evaluating risk-adjusted returns for portfolio construction purposes. This methodology places all alternative exposures on comparable footing, though it requires investors and advisors to conduct supplementary analysis of individual fund offerings to determine suitability for specific portfolio objectives.
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