Here's a unique, yet somewhat pricey, idea for an open-end mutual fund.

Take an existing index that mimics hedge fund strategies in all its different forms. Then, make it available via an open-end mutual fund at lower prices than a typical ultra-expensive hedge fund.

That's just the tack IndexIQ is bringing to market. The new fund is also utilizing exchange-traded funds as part of its investment strategy. The result is what IndexIQ is calling the first no-load, open-ended mutual fund based on hedge fund replication techniques.

The IQ Alpha Hedge Strategy Fund is being sold directly by IndexIQ. The firm says it's also in talks with various third-party distributors to offer the fund across more platforms. When it starts collecting assets, the firm says it'll move toward even wider distribution.

But keep in mind that an investor in the IndexIQ fund will bear the operating expenses of the underlying ETFs and related securities in addition to the operating expenses of the fund.

The IQ Alpha Hedge Strategy Fund has a net expense ratio of 1.64%,the firm says. The fund requires a minimum investment of $2,500 for its investor class shares. Institutions and those buying at least $250,000 worth of Alpha Hedge Strategy can invest through an institutional share class with a net expense ratio of 1.39%. (Those expense ratios include the fees of the underlying securities).

While those cost structures are more affordable than most hedge funds—which typically charge expense ratios of 2% or more and take a cut of any gains—will Alpha Hedge Strategy sell in the mutual funds world?

According to the Investment Company Institute, the industry's main trade group, the average open-end mutual fund had an expense ratio of 1.47%. And that's including both index funds as well as actively managed ones. Adjusted on an asset-weighted scale, that average falls to 0.86%, says the ICI.

Previous Limitations

"Interest in hedge funds has grown enormously over the past decade. However, the vast majority of investors have not had access to this important asset class," said Adam Patti, chief executive officer at IndexIQ. "High net worth requirements and regulatory restrictions, among other factors, have essentially limited participation to wealthy individuals and institutions."

The IQ Alpha Hedge Index uses proprietary algorithms to closely replicate the returns of six major hedge fund strategies: Equity Long/Short; Global Macro; Emerging Markets; Fixed Income Arbitrage; Equity Market Neutral; and Event Driven. Alpha is then sought by optimizing the relative index weights among these six hedge fund strategies. The objective of the IQ Alpha Hedge Index is to provide superior returns with lower volatility relative to the S&P 500, and with a correlation similar to that between hedge funds generally and the S&P.

In constructing the fund, IndexIQ uses ETFs and a variety of other highly liquid financial instruments to provide exposure to the components of the index in approximately the same weighting. The fund employs leverage totaling 25% of the portfolio to magnify returns.

"There is a significant body of academic research that supports the ability of hedge fund replication strategies to capture the characteristics of broad-based hedge fund returns, without the associated costs and risks of investing directly in the underlying strategies," said Professor Robert Whitelaw, chairman of the Finance Department at New York University's Stern School of Business, and Chief Investment Strategist at IndexIQ. "The IQ Alpha Hedge Strategy Fund employs the latest research and modeling techniques to provide access to these strategies in a low-cost, open-end investment vehicle."

IndexIQ isn't the first to come out with such a benchmark. Others, such as Goldman Sachs, have also been working in this area.