Saturday, August 17, 2013

Trade like the hedge fund gurus

Is it possible to invest exactly like the best hedge funds in the world? It may be easier than you think: by utilizing Exchange Traded Funds you can play the same positions that those successful hedge funds hold, all that without the high cost and performance bonuses of hedge funds.

Currently there are various ETF's that track the positions of top managers. The Top Guru Holdings Index ETF (Global X) selects 68 hedge funds and subsequently looks at the best ideas for example. Alpha Clone has a similar ETF, the AlphaClone Alternative Alpha ETF. This ETF uses a slightly different methodology with a patented ranking system. Furthermore, this ETF has a dynamic hedge mechanism. AlphaClone shorts are allowed up to 50% during a prolonged decline in the market.

SEC Filings

How do these ETF's know which positions hedge fund managers are holding? In the US it is mandatory for each hedge fund that's holding more than 100 million dollars to report which positions are held. This is done with a so-called 13F-document from the Securities and Exchange Commission (SEC), ostensibly the watchdog of US financial markets. It states which positions were held, added or phased out in the last quarter.
There are a lot of investors who are really looking forward to this announcement because it provides them with a lot of insight how top managers invest. There is only one disadvantage to this strategy: traders and investors are running behind the facts. The announcement never happens on the moment when a stock is added to a portfolio of hedge fund. It may well be that the manager has taken a position in January and disclosed this in April's 13-F filing. The stock price could have significantly risen in the meantime, which makes buying not as attractive anymore.


Aside from that, it remains guesswork for the trader about the reason for the purchase. Some investors, like Daniel Loeb and David Einhorn, are a little more transparent than others. For instance, Einhorn said to be long Apple because it's a company with a great product portfolio and a good balance sheet. But not every investor talks openly about the transactions.
So an investor who follows the "follow the best hedge fund guru strategy" must have a lot of confidence in the regarding manager and his investment style. Funds that handle a short-term strategy exit funds a lot quicker and so the filings don't mean a whole lot. The stock may already been sold again during the next filing.


The ETFs also know this of course, and therefore only include funds that are known for their longer term strategy. Global X skips funds with a high turnover for instance. The ETF tracks Greenlight Capital (David Einhorn) and Third Point (Daniel Loeb) among others. So far the returns of the Global X fund since its inception in 2012 is: 50.29% (S&P 500 was 29.71%). As you can see, despite the handicap, the results are more than satisfactory. In addition, the costs are also way lower than the usual annual fee of 2% plus a bonus payment (can go up to 25%).


Although the idea behind these ETF's is pretty attractive, I'm not a big fan of it. As a trader it is best to work with your own vision on the markets, so that you can see why a trade was successful or not based on that. However, that's not to say those ETFs could serve as an inspiration: because also ETF's disclose which funds are currently held. For the Global X holdings click here and here for the ones from Alpha. Pandora and Mastercard are a few names that stand out.

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