Should We Follow the Strategies of the World's Top Investors?

by: M F

by Maz Jadallah

A couple of days ago one of our favorite financial reporters, Greg Zuckerman, was being interviewed on CNBC regarding a story he had written for WSJ called “Picks & Pans From Market Pros. Zuckerman had recently interviewed a handful of hedge fund managers for their investment ideas including George Soros (Soros Fund Management), John Paulson (Paulson & Co.) and Alan Fournier (Pennant Capital) and was reporting on where those investors were currently making their bets.

When we saw his interview, we asked ourselves the same questions that we believe every other investor watching the interview asked:

  • Does it make sense for us to follow these stock ideas?
  • Isn’t it too late to invest in them?
  • How can we discover the answers to these questions and continue to validate them going forward?

Let’s get one thing clear – the best way to get access to a hedge fund manager’s stock ideas is to invest in his/her fund at a reasonable price. But for the 99,9% of us who don’t have that access, wouldn’t the above questions need to be answered (at a minimum) before we seriously considered placing a bet that follows any hedge fund manager? Sorry for the rhetorical question but obviously the answer is “yes” and we built “AlphaClone” to do exactly that – instantly.

Looking at the Soros Fund Management page on AlphaClone and then selecting his Top 10 Holdings clone, we can quickly view how a portfolio that invested in his ten largest equity holdings each quarter at the time they are disclosed publicly performed since 2000. To be specific, this clone is long only, is equal weighted, and (like all our clones) includes only long equity positions disclosed in a fund managers’ quarterly SEC filing. For you research geeks, it is also worth noting that our clone performance numbers include the effects of both currently active and inactive securities (i.e. thus avoiding bias). Here is a summary of the clone’s performance:

Top 10 Holdings Clone
Based on: Soros Fund Management disclosures



YTD (7/7/09)



3 Year Annualized



5 Year Annualized



Since 2000 Annualized



Click to enlarge

While the clone is up an impressive 20% year to date, historically its returns are on par with the S&P500TR. To be fair, that could simply be due to the fact that Soros deploys a “macro” investment strategy and if you are a reader of our commentary, you know that macro investors don’t tend to “clone” very well. That could be because a manager’s SEC filings (and thus our clones) do not list investments in futures, currencies and derivatives, all of which are widely used by “macro” investors such as Soros.

Still, that is exactly our point! Now you know how a strategy that follows Soros’ top holdings performs so you’re making an informed decision if/when you decide to invest in a strategy that follows him. It’s the difference between blindly following and intelligently applying the ideas of the world’s top investors.

What about the other managers mentioned in the interview? How do clones based on their stock ideas perform? AlphaClone tracks both Paulson and Pennant and the Top 10 Holdings clone for one of the managers is up 10% year to date and has returned 19.4% annualized since 2003 (yes, 19.4% annualized).

So the next time you hear or read a news article on what the smart money is doing, we hope your first question will now be, “I wonder how their clones perform?”