Would you like to invest with George Soros, John Paulson or
other hedge fund managers but lack the $500,000 to $1 million
minimum investment typically required to gain entry? ETFs in a
growing list of hedge-fund trackers hope they have the
The ETFs' strategy is fairly simple. The SEC requires
investment managers to file 13-F reports showing their holdings
every quarter, and these reports are open to the public. So the
ETFs screen these for the more promising.
True, the info is dated because the reports aren't due until
45 days after the end of the quarter. But as some hedge funds
tend to have long holding periods, this makes this strategy
feasible for ETFs.
Previously, if you wanted to follow this strategy, you would
have to do this research on your own. Now ETFs can do the work
for you.AlphaClone Alternative Alpha ETF (
) launched in May 2012 and Global XGuru ETF (
) about a month later.
Both ETFs have outperformed the S&P 500 since their
inception. GURU is up 56% since June 15, 2012, while ALFA is up
45% andSPDR S&P500 (
) is up 37%.
How would they have done during a bear market? AlphaClone
provided performance data from their back-test of the underlying
index. During 2007 when the S&P 500 index was down 37%, the
AlphaClone Alternative Alpha Index was nearly flat with a 0.75%
gain. One other statistic of note for ALFA is that during their
back-test from January 2000 through December 2013, the index had
a very impressive risk vs. return rate. A high return of 18.5%
with a fairly low standard deviation of 11.3% points to a low
risk-high reward investment.
So what differentiates these two ETFs? First, ALFA follows a
proprietary system that takes the managers' top holdings and
equally weights them. The fund also has a hedging overlay to the
portfolio. So if the market is down for a prolonged period of
time -- when the S&P 500 is below its 200-day moving average
-- it goes into an S&P 500 inverse fund. (The S&P 500 is
about 5% above its 200-day moving average.)
GURU, on the other hand, looks for highly concentrated
portfolios managed by hedge funds and invests in their top
ALFA is more weighted towards small-cap stocks, while GURU is
considered a large-cap fund.
GURU takes 0.75% of assets to cover expenses, while ALFA has
an expense ratio of 0.95%. Both are below the typical actively
managed mutual fund expense fees and well below hedge funds' rake
of 2% for management and 20% of profits.
Where They Fit
Both ETFs can fit into a long-term portfolio by using proper
asset allocation. GURU can be appropriate in a large-cap
allocation. ALFA could fit into two allocations: small cap and as
a hedge. Their volatility may be too low to be of much interest
to short-term traders.
Global X launched two more guru ETFs on March 10: Global XGuru
Small Cap ETF (
) and Global XGuru International ETF (
In addition, Direxion is preparing to launch Direxion
iBillionaire Index ETF, according to SEC filings. The ETF will
limit its list of guru managers to billionaires and only invest
in S&P 500 constituents. Expenses are pegged at 0.65%.