There's been an explosion in the number of exchange-traded funds (ETF news) that mimic hedge fund strategies. The target audience for this has always been thought to be retail investors. But ETFdb suggests that some institutions may be investing in these products as well.

Many institutions may have been turned off by recent experiences, if their ability to redeem funds was curtailed somewhat arbitrarily, for example. Hedge fund ETFs indeed offer some advantages over hedge funds themselves, "including enhanced transparency, significantly lower fees, and superior liquidity."

Someone soon just might launch a fund of hedge fund ETFs, akin to a fund of hedge funds. Core investments in such a product might include the IQ Hedge Multi-Strategy Tracker ETF, which aims to replicate various standard strategies. The IQ ARB Merger Arbitrage ETF may be attractive. And the iShares Diversified Alternatives Trust seeks non-correlated gains.

There will likely be more ETFs of this ilk coming on line soon. One issue will likely be liquidity. Buying and selling shares in some of these funds in bulk will not be easy. But the fee story for investors will be compelling.

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