Long-Short and Other Alternatives in Exchange-Traded Funds

A wide variety of long-short and other alternative strategies are available in ETF structures. One such strategy, termed "buy-write" or "covered call writings," entails writing (or shorting) calls on a stock index while holding a basket of stock representing that index. The premium received from writing the calls provides some offset against a potential downside move in the index.

Merger arbitrage

Merger arbitrage is another long-short strategy available in ETFs. This strategy buys stocks that are acquisition targets and shorts the stocks of the acquiring companies or a broad index of stocks to hedge away general stock market risk. The goal is to capture the premium prices received for the target stocks. Another long-short strategy, 130/30, seeks to provide the same market exposure as the benchmark stock index, but it attempts to outperform the index by leveraging some long stock bets while taking short bets on some stocks.

Getting hedge-fund-like returns

Some ETFs attempt to achieve hedge-fund-like returns by analyzing the returns of a database of hedge funds and "replicating" those returns by investing in other ETFs or, to a smaller extent, swaps or futures contracts. These funds tend to have a heavy equity exposure, although they generally exhibit lower volatility than the broad equity indexes. Some ETFs, rather than replicating hedge fund returns, apply active long and short hedge fund strategies using futures. Investors should be aware that futures-based ETFs are taxed differently than traditional equity or bond investments. Finally, for those investors who don't know how to assemble a portfolio of alternative assets, multi-strategy or multi-asset-class alternative ETFs may be the solution.