At the start of 2014, Joanne Hill was preparing to present at a conference focused on alternative investments for financial advisers. Exhibit 1 provides selected slides from the presentation. Hill wants to showcase how Hedge Replication ETF (HDG) provided an exposure to hedge funds at low fees, with full transparency and providing daily liquidity. But she had to overcome some resistance in the audience because most hedge fund strategies had underperformed the overall stock market in recent years. Could 2014 be a comeback year for hedge fund strategies? Excerpt UVA-F-1714 Feb. 19, 2015 ProShares Hedge Replication ETF At the start of 2014, Joanne Hill was preparing to present at a conference focused on alternative investments for financial advisers. As head of institutional investment strategy at ProShares, Hill had been part of the research and development team behind the firm's lineup of exchange-traded funds (ETFs). ProShares was a leader in packaging liquid alternative strategies in ETFs, using combinations of securities and derivatives products. Hill's presentation on that day was titled “Hedge Fund Replication: A Closer Look,” and it was focused on one of ProShares's liquid alternative strategy products: the Hedge Replication ETF (HDG). Exhibit 1 provides selected slides from the presentation, which can also be watched online. Hill wanted to showcase how HDG provided an exposure to hedge funds at low fees, with full transparency and providing daily liquidity. But she had to overcome some resistance in the audience because most hedge fund strategies had underperformed the overall stock market in recent years. For example, HDG's return had been 4.4% in 2013 (with volatility of 4.8%), while the S&P 500 index had returned 32.4% over the same period (with 11% volatility). Could 2014 be a comeback year for hedge fund strategies? ProShares: The Alternative ETF Company ProShares, based in Bethesda, Maryland, had established itself as the world's largest manager of short and leveraged exchange-traded funds, which the firm labeled as “geared” ETFs. Its affiliate, ProFunds, was founded in 1997, offering leveraged and inverse mutual funds across a range of equity and bond indexes. In 2006, ProShares introduced geared ETFs, the first of their kind ever offered. These geared ETFs sought to deliver multiples of the performance of the index or benchmark they tracked. Ultra (or leveraged) ETFs had daily objectives to produce 2× or 3× the daily return of an index. Short (or inverse) ETFs sought to deliver −1×, −2×, or −3× daily exposures and were designed to go up when market indices went down and vice versa. To accomplish their objectives, geared ETFs used collateralized positions in swaps, futures contracts, and other derivative instruments. Some ProShares ETFs tracked broad equity indices, some were sector specific, and still others were linked to bond, commodity, and currency indexes. These ETFs could be purchased and sold like stocks and allowed investors to take hedging and speculative positions without directly using any derivatives. . . .