HardAssetsInvestor

Mike Norman (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today we will be talking about ETFs with my guest, Adam Patti. He is the CEO of Index IQ. Adam, thanks very much.

Adam Patti, CEO, Index IQ (Patti): Good to be here.

Norman: Thank you. Index IQ — tell us a little bit about your company and what you do.

Patti: Great. We got started in 2006 to democratize alternative investing. And what that means is, we wanted to apply index-based methodologies to the more sophisticated institutional class investment strategies that really weren't available to most investors. Why should the largest institutions in the ultra-high-net worth have access to the best strategies?

So we got started. And, long story short, our products come in three categories; generally all liquid alternative strategies. One is absolute return product, including our hedge fund replication strategies … which we’re the leader in the world, actually, in those types of products: real assets, commodities and real estate, and so forth, and then our unique international exposures, including small- and midcap strategies.

Norman: You started in 2006. Has the acceptance of these products been a broad, welcome acceptance of this?

Patti: Absolutely. It took about two and a half years to actually launch our first ETFs, or, our first ETF launched in March 2009. And since then, we’ve been out educating advisors. We’re still a small company. But our products are really all about education. And it’s important to go out and tell advisors not only what our products are, but how they're built, and how they work in your portfolio.

Norman: So tell us a little bit about the hedge fund ETFs that you have. They're based on a hedge fund index, correct, an index that you created in-house?

Patti: Yes, that’s right. These are really exciting products. And really, I believe these products have the opportunity to kind of reshape the entire investment management industry, just like Vanguard did in the 1970s. The reason for this is because the hedge fund marketplace now looks so much like the mutual fund market. There’s 10,000 hedge funds. There’s 10,000 active mutual funds.

And what we all know is that about 85 percent of active managers underperform their benchmark. So why wouldn’t that apply, also, in the hedge fund marketplace? The academics proved in the ’90s that actually hedge fund performances comprise a lot of beta. Not necessarily S&P 500 beta, but other, more diversified streams of risk premia across different asset classes. And you could replicate hedge fund performance using liquid securities by identifying those asset class exposures and capturing them in a portfolio. And that’s what we do.

So our indexes, which we created, have been live with Standard & Poors. They’ve been calculating with them since March 2007. And those form the basis of our products, which are designed to improve diversification in investor portfolios.