Hedge Fund Cloning Update: Imitation Still Flatters

by: M F

by Maz Jadallah

In a white paper by Martin and Puthenpurackel entitled "Imitation is the Fondest Form of Flattery", the authors highlighted that a replicated portfolio based on public disclosures by Berkshire Hathaway (NYSE:BRK.A) beat the broader market by eleven percentage points annualized since 1976. The authors concluded that:

"Although beating the market in all but four years can statistically happen due to chance, incorporating the magnitude by which the portfolio beats the market makes a luck explanation extremely unlikely..."

So in our first article of our "Does Cloning Work?" series we decided to apply the annualized 10 percentage point rule to our clone universe. We found that; "On average, roughly a third of all long-only clones outperform the index by 10% or more annually. Even during the dramatic market downturn last year and with all ranked clones un-hedged, nearly 300 clone portfolios still managed to meet the 10% threshold."

How is our clone universe performing in 2009? Just taking our Top 10 Holdings strategy as an example; of our 246 clone portfolios, 64% is outperforming the S&P 500 year to date return of 5.3% and 43% (almost half!) are beating the index by ten percentage points or more, returning better than 15.3% year to date (as of 6/8/09) - which means that imitation continues to be very flattering.

Our article on cloning high concentration hedge funds from a few weeks ago got a lot of attention. Not surprising since clones based on our Concentrated Funds group beat the S&P 500 index by a mile. This group combines the 25 funds with highest total market values but who have less than 50 total equity positions in their most recent filing. The list of managers can change quarterly, but there isn't that much turnover Q/Q. Notice that the strategy makes no distinction regarding the style of the manager, or to their value added (destroying) abilities.

Taking the top 3 holdings from each fund, equal weighted and rebalanced quarterly, outperforms the market by 11 percentage points a year since 2000. Taking the 10 most popular stocks from these funds, equal weighted and rebalanced quarterly, outperforms the market by over 15 percentage points a year since 2000.

How are the two clones above performing so far this year? Top 3 is beating the S&P500TR index by 9 percentage points, and the group's 10 Most Popular clone is beating by 26.3 percentage points (yes, 26.3) as of 6/8/09.

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In our second article in the "Does Cloning Work?" series, we decided to look at how well our clones performed on a sector by sector basis. We compared the annualized performance (since 2000) of the Top 10 Popularity clone for each of our Sector Picks fund groups. If you recall the results were impressive - the clones beat their corresponding benchmark index in 11 of 12 sectors, 7 of 12 beat by five percentage points or more and 4 of 12 beat by ten percentage points or more. How are those clones doing so far this year? The table below speaks for itself:

SECTOR PICKS: TEN MOST POPULAR CLONES

2009 YTD Performance vs. Benchmark Index (as of 6/8/09)

Fund Group
Clone
Index
+/-
Sector Picks: Consumer Cyclical
53.5%
11.9%
41.6%
Sector Picks: Basic Materials
35.3%
19.0%
16.3%
Sector Picks: Utilities
7.8%
-8.2%
16.0%
Sector Picks: Capital Goods
16.3%
1.2%
15.1%
Sector Picks: Energy
16.1%
3.4%
12.7%
Sector Picks: Services
3.6%
-9.0%
12.6%
Sector Picks: Technology
35.8%
24.0%
11.8%
Sector Picks: Financial
8.6%
-1.3%
9.9%
Sector Picks: Conglomerates
-5.6%
-10.6%
5.0%
Sector Picks: Transportation
0.3%
-3.6%
3.9%
Sector Picks: Healthcare
-1.8%
-4.8%
3.0%
Sector Picks: Con Non-Cyclical
1.3%
-1.2%
2.5%
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