Multistrategy ETFs

Diversification is one of the most valuable things you can have as a trader or investor.

It increases your ability to keep things chugging along without suffering unacceptable losses and underwater periods.

Even if you buy a bunch of stocks, they mostly move up and down together.

You can go into other things like bonds and gold, which can diversify you, but you’re always looking for other ways to improve.

What about multistrategy ETFs?

Are they effective at this?

Can they give you your entire trading or investment strategy in one fund and eliminate the need to hold various other funds?

We’ll take a look.

Key Takeaways – Multistrategy ETFs

• Multistrategy ETFs bundle multiple hedge fund style sleeves.
  • This can include long-short equity, carry, trend, and macro, into one wrapper to smooth returns and lower volatility.
  • But they often retain meaningful hidden exposure to traditional asset betas.
• FLSP
  • The closest thing here to a true diversifier.
  • Correlations stay low versus stocks, bonds, and gold, but returns are modest.
  • May work best as a small stabilizing sleeve paired with separate return engines.
• HDG
  • More of a hedge fund beta proxy than a hedge.
  • It diversifies process more than outcomes.
  • It keeps meaningful equity linkage.
  • Its low return means it rarely earns its portfolio real estate unless you value volatility smoothing.
• HFND
  • High equity correlation makes it an equity surrogate with smoother returns.
  • The volatility looks lower, but the upside tradeoff is large relative to how much diversification you actually gain (especially after fees).
• QAI
  • Similar issue to HFND.
  • It behaves like a low volatility equity substitute, not a true alternative.
  • So it tends to lag in strong equity environments while still drawing down when equities sell off.
• LALT
  • A better risk adjusted profile than most multistrategy peers with moderate equity beta and meaningful overlap with gold beta.
  • It can dampen volatility in your portfolio, but it isn’t a crisis hedge and won’t reliably break correlations in stress.
• HFGM
  • Too new to trust the statistics.
  • The holdings imply heavy futures exposure and potential leverage, so it can deliver big moves – both up and down.
  • You should treat it as experimental until it has a full cycle of data.
  • Roughly double the volatility of the S&P 500
• DBMF
  • Managed futures replication that actually improves diversification.
  • Correlations are low to negative in key stress regimes and returns have been competitive.
  • It functions as a portfolio stabilizer that can add convexity – and even the possibility of negative correlation.
• CTA
  • The most explicit diversifier in the group.
  • Correlations can be strongly negative to stocks and bonds because it can flip exposures aggressively.
  • But with this, you’ll need to accept higher volatility and more variable short-term outcomes.

Multistrategy ETFs We’ll Cover

Our filter here involves fund expenses of under 100bps annually and an operating history of 3+ years:

We’ll also cover an additional fund that just barely missed our cutoff but is still worth exploring as a bonus:

Others that are not technically considered “multistrategy” we’ll also briefly mention:

• HFGM – Macro hedge fund exposures. Use of futures and leverage, roughly double SPX volatility.
• DBMF – A managed futures strategy.
• CTA – Also a managed futures strategy, but with more aggressive trend-flipping than DBMF.

FSLP – Franklin Systematic Style Premia ETF

This Franklin Systematic Style Premia ETF (FSLP) is an actively managed fund. 

It’s a “quant” fund, meaning it uses a rules-based strategy to provide long-short exposure across multiple factors that we cover in more detail here (value, momentum, carry, and low volatility).

And it does so cross global equity, fixed income, commodity, and FX markets.

Let’s look at the correlations:

Asset Correlations

36-month monthly correlations:

So, these correlations show what you might call a “structural diversification stack” rather than a tactical one.

The stability across horizons matters more than the exact values.

Across the 36-month monthly window, FLSP show:

• near zero correlation to SPY at 0.10,
• modest negative correlation to TLT at minus-0.18, and
• low correlation to GLD at 0.09

That’s exactly what a systematic style premia sleeve is supposed to do.

It behaves independently of equity beta, doesn’t rely on bond duration (like a lot of funds we covered here). And it doesn’t overlap materially with FX diversification/inflation hedges like gold.

The 120-day daily correlations give additional confirmation. 

FLSP stays weakly correlated to SPY at +0.15 and mildly negative to TLT at minus-0.07. 

The tradeoff is yield. FLSP’s annualized return around 4% is low relative to SPY and GLD over these periods. The limited volatility also means its return range will naturally be constrained over time.

But ultimately you don’t own it for income or upside capture. You own it to stabilize portfolio variance and reduce drawdowns.

What to do about the low yield depends on portfolio role. 

One school of thought is to not lever FLSP alone. Instead, they might pair it with other things like short-duration credit, CLO equity, option-based income strategies, standard stocks and bonds, all while keeping FLSP uncorrelated. 

Alternatively, modest portfolio level leverage across the entire diversified mix preserves its risk-reducing benefits without breaking the correlation structure.

HDG – ProShares Hedge Replication

Unlike FSLP, HDG is a passively managed fund. 

Its goal is to replicate the risk-adjusted performance of the broad hedge fund industry.

It does so by tracking a benchmark (HFRI Fund Weighted Composite Index, a Merrill Lynch benchmark) that allocates across equities, bonds, and currencies to mimic what they call “hedge fund beta.”

The Merrill Lynch benchmark uses a mathematical model to analyze how those ~2,000 hedge funds that it’s tracking are behaving. It breaks their returns down into simple market factors (e.g., “hedge funds are currently acting like 30% S&P 500, 10% bonds, and 5% currencies”).

HDG then buys those liquid assets (mostly Treasury bills and swaps on the S&P 500 or EAFE indices) to replicate that exposure.

And the goal, ideally, is for hedge fund beta to not (or minimally) match the beta of stocks, bonds, commodities, and other traditional returns streams.

Asset Correlations

Asset Correlations

HFND – Unlimited HFND Multi-Strgy Ret Trckr ETF

HFND is an actively managed fund that uses machine learning algorithms to analyze and replicate the aggregate return profile of the hedge fund industry.

Its goal is to match their gross-of-fee performance – i.e., dynamically allocating long and short positions across global equities, bonds, and commodities.

So let’s look at correlations:

Asset Correlations

QAI – NYLI Hedge Multi-Strategy Tracker ETF

QAI is a passively managed “fund of funds.” 

What they’re trying to do here is replicate the risk-adjusted returns of the broad hedge fund universe.

They’re essentially tracking an index that allocates across strategies like long/short equity, global macro, and market neutral.

Asset Correlations

Asset Correlations

It has a total expense ratio of 0.88%.

LALT – First Trust Multi-Strategy Alternative ETF

Asset Correlations

Asset Correlations

HFGM – Unlimited HFGM Global Macro ETF

This actively managed fund uses algorithms to replicate the aggregate returns of the global macro hedge fund industry (i.e., strategies that bet on economic shifts in rates, currencies, and equities).

Asset Correlations

Asset Correlations

Asset Correlations

FAQs – Multistrategy ETFs

Are multistrategy ETFs good diversifiers?

They can be, but it depends on what’s in them.

How much equity beta they carry?

Do their correlations actually stay low during market stress – rather than just smoothing volatility in normal conditions?

Those are the questions that are important to explore and what we tried to touch on in this article.

Can multistrategy ETFs give you everything you want in one fund?

Generally not. They trade simplicity for more advanced strategies that you don’t necessarily know. They often contain beta to one or more asset classes. You can lose the ability to size exposures precisely.

Can multistrategy ETFs replace regular stock and bond funds?

Generally no. Most multistrategy ETFs embed a decent bit of equity and rate exposure. Standard core beta building blocks are still part of them, so you generally get the correlations and repeated exposure.

You might get increased complexity without improving long-term returns, drawdown protection, or correlation control across different market environments.

So then who are multistrategy ETFs actually best suited for as traders or investors?

They’re best suited for those who: 

• want simpler portfolios with lower headline volatility (which is usually the case),
• accept moderate equity beta, and 
• value behavioral comfort over precision, drawdown convexity, or maximizing long-term risk-adjusted returns

How do multistrategy ETFs actually make money across market cycles?

They earn returns by combining multiple risk premia and trading styles, such as equity beta, carry, and trend.

These work in different environments. But they often dilute each other and reduce upside during markets where concentrated exposures dominate.

What risks do multistrategy ETFs fail to protect against?

For example:

• Deep equity market crashes where hidden equity beta can still dominate
• Inflation shocks that cause stocks and bonds to sell off together (e.g., 2022, 1970s)
• Liquidity events where correlations spike across strategies
• Levered funds that combine different betas, but the leverage outweighs the diversification benefits
• Prolonged trending markets that favor concentrated exposures
• Environment shifts that break assumed diversification between strategies

How do multistrategy ETFs behave during equity market crashes?

They usually decline alongside equities, just less sharply, because embedded equity beta overwhelms strategy diversification when correlations spike and risk assets de-risk simultaneously.

Do multistrategy ETFs reduce drawdowns or just smooth volatility?

Generally, they mostly smooth volatility rather than materially reduce drawdowns.

This is due to the fact that diversification across strategies doesn’t eliminate shared exposure to equity risk.

How much equity beta typically is contained within multistrategy ETFs?

Most multistrategy ETFs carry moderate to high equity beta, often between 0.3 and 0.8.

So, a large portion of their returns and drawdowns are still driven by equity market movements rather than independent strategies.

Why do many multistrategy ETFs underperform simple stock and bond portfolios?

Many underperform because fees, turnover, and strategy diversification dilute strong return drivers.

Some are also long-short, and being short risk premiums over time may lessen correlations at the expense of returns.

For many, equity and rate exposure capture a lot of the downside without fully participating in equity upside during bull markets.

Are multistrategy ETFs better held long term or tactically as a satellite or for trading purposes?

Multistrategy ETFs generally work better as long-term satellite holdings rather than trading vehicles. 

Their return profiles rely on slow-moving risk premia and diversification effects, which don’t generally fit or respond well to short-term timing. 

Trading them often adds friction without improving outcomes.

How do fees affect the long term effectiveness of multistrategy ETFs?

Fees compound against what are modest returns in some funds.

So even small expense ratios can erase much of the diversification benefit and materially reduce long-term risk-adjusted performance.

Can multistrategy ETFs replace bonds in a diversified portfolio?

No. Multistrategy ETFs lack the reliable crisis convexity and duration sensitivity that bonds provide.

So they can’t consistently offset equity drawdowns or stabilize portfolios during deflationary or recessionary shocks.

(Note: Bonds tends to do a poor job of diversifying equity risk during inflationary shocks, like in 2022.)

Related: Risk Parity Without Bonds

How do multistrategy ETFs differ from managed futures and CTA strategies?

Multistrategy ETFs blend many styles. 

They often embed equity and carry exposure that keeps them tied to traditional assets. 

Managed futures and CTA strategies focus on trend following. 

This allows them to go short risk assets and deliver stronger crisis diversification.

Managed futures and CTA strategies are much closer to trading than longer-term investing.

What market environments are multistrategy ETFs most vulnerable to?

Generally, the usual things that sink most portfolios.

They’re most vulnerable to: 

• equity drawdowns
• inflation shocks where stocks and bonds fall together, and 
• fast environment shifts that cause correlations across strategies to converge rather than diversify

How transparent are the strategies inside multistrategy ETFs?

Transparency is usually limited. Holdings are disclosed. You can usually get snapshots on the fund websites.

But the decision rules, factor exposures, and dynamic positioning that drive returns are often opaque.

This makes it difficult to understand true risk, hidden beta, long-run return expectations, or how the ETF will act in different/unfamiliar market environments.

Do multistrategy ETFs deliver true diversification or just strategy diversification?

They mostly deliver strategy diversification rather than true diversification.

Many underlying strategies share common exposure to equity risk and other beta risk.

How should multistrategy ETFs be sized within a broader portfolio?

They should generally be sized modestly, typically as a small satellite allocation.

This way they can smooth volatility without meaningfully diluting core equity returns. Or masking portfolio risk with hidden beta.

When does adding a multistrategy ETF reduce portfolio efficiency?

Adding multistrategy ETFs reduces portfolio efficiency when they: 

• overlap heavily with existing equity or bond exposure
• add fees without lowering drawdowns, or 
• replace higher-return assets while failing to deliver quality diversification during stress