Guru-Following ETFs Track Hedge Funds
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 answer.
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 ( ALFA ) launched in May 2012 and Global XGuru ETF ( GURU ) 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 ( SPY ) 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 picks.
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.
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%.