ETFs that attempt to replicate hedge fund strategies are losing assets as the tactics have underperformed benchmark equity and bond indexes.

Investors have pulled about $95 million, or 4.5% of assets, so far this year from U.S.-listed alternative ETFs, the biggest quarterly outflows since early 2014, according to data compiled by Bloomberg.

The fund strategies include equity hedge, macro and managed futures. The median return of the 29 ETFs is 0.99% this year, compared to a 4.7% gain in the S&P 500 and a 1.16% rise in the Bloomberg U.S. dollar investment grade corporate bond index.

"Some hedge fund replication strategies are unproven and use correlation to try to emulate a certain sector in the hedge funds realm," says Arian Neiron, managing director at VanEck Australia. “When you create an index that’s overly complex, too opaque and doesn’t behave as expected based on the return profile, then your appetite would be muted and revert to mainstream asset classes where investors understand how they work.”

The outflows are another indication of the hedge fund industry’s declining popularity after years of underperformance. A global gauge of hedge fund performance showed average annual returns of about 4% in the five years through February, less than half of the MSCI World Index’s gain, according to Hedge Fund Research.

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Investors withdrew a net $70 billion from the $3 trillion industry last year, ending a six-year streak of net deposits, according to the Chicago-based data provider.

The biggest alternative strategy in Bloomberg’s database is IndexIQ Advisors’s IQ Hedge Multi-Strategy Tracker ETF [QAI] with more than $1 billion in assets after a net decline of $87 million so far this year, according to data compiled by Bloomberg. The swap-based fund uses derivatives to replicate hedge fund returns. It is up 1.15% this year. The withdrawals are due to changing risk perception from investors, according to Salvatore Bruno, chief investment officer at the New York-based firm.

“With the post-election bounce in the equity markets, investors have become more risk on,” Bruno said. “They have been funding the equity allocated shift partially from their liquid alternative positions including hedge fund ETFs.” As volatility returns to the markets, "we expect that investors will seek out hedge fund ETFs to help cushion their portfolios."

Equity markets have outperformed fixed income this year amid what some are calling the great rotation, a massive shift from bonds into equities. The S&P 500 is close to record highs, even after a decline this month, while the CBOE Volatility Index is close to all-time lows.

“The outflows could be performance-driven or macro-driven,” said Alex Vynokur, managing director at BetaShares Capital in Sydney. Given the rising risks in markets, “investors are looking to ETFs to provide access to a variety of exposures including strategies that have low correlation to the market."

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