ProShares files for hedge fund replication ETF

Proshares has filed paperwork with the Securities and Exchange Commission for an ETF that aims to follow the performance of hedge fund beta.

The Hedge Replication ETF seeks investment results that track the performance of the Merrill Lynch Factor Model - Exchange Series.

This index maintains a high correlation with hedge fund beta performance by using the HFRI Fund Weighted Composite Index, which reflects performance through the construction of an equally weighted composite of over 2000 constituent funds.

Each month the index utilises a systematic model to establish positions, weighted long or short, in six underlying factors.

These are the S&P 500 Total Return Index, the ProShares UltraShort Euro ETF, the MSCI EAFE US Dollar Net Total Return Index, the MSCI Emerging Markets Free US Dollar Net Total Return Index, the Russell 2000 Total Return Index and one-month USD Libor.

The index is not comprised of, and the fund will not be investing in, any hedge-fund or group of hedge funds. Instead, the fund holds a combination of equity securities and derivatives, including swaps and forward contracts, and is able to invest in other ETFs.

As the fund may only gain exposure to a limited sample of the securities in the underlying index, Proshares advisors use a mathematical approach to determine the type, quantity and mix of investment positions necessary to approximate the performance of hedge fund beta.

This ‘sampling' process typically involves selecting a representative sample of the securities with an aim to enhance liquidity and reduce transaction costs whilst maintaining similar aggregate characteristics of the index.

The filing reveals an anticipated 0.95% expense ratio.