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Hedge Fund ETFs - Making Gains With Momentum

Since the fourth quarter for the stock market is now in full swing, we note that many hedge funds are trailing the market this year (again) as can be gauged by the plethora of hedge fund index benchmarks.

For us regular folks who wish to get in on the action, these two ETFs aim to replicate hedge fund holdings by picking thru recent 13F filings of the top hedge funds and then quantitatively indexing these hedge fund stock holdings into an ETF wrapper. These young ETFs are bucking the hedge fund industry's performance - by solidly outperforming the S&P 500 (NYSEARCA:SPY).

(NYSEARCA:GURU) Global X Top Guru Holdings Index ETF

The Global X Top Guru Holdings Index ETF commenced trading on June 6, 2012 and tracks investment results before fees and expenses the snazzy named "Top Guru Holdings Index". This ETF seems to be catching on with investors as its market cap is already a respectable $205 million.

Description of Index:

Here's a description of the Top Guru Holdings Index from the folks at Global X:

"The Top Guru Holdings Index uses a proprietary methodology to compile the highest conviction ideas from a select pool of hedge funds where the 13F information is most valuable. For example, hedge funds with high turnover are eliminated from the pool. The goal of the Global X Top Guru Holdings Index ETF is to aggregate on a quarterly basis the ideas and knowledge of hedge fund managers into the transparent, cost-efficient and easily accessible format of an ETF."

Performance and Fund Details:

Year to date performance for the GURU ETF is a very healthy 37% versus 25% for the S&P 500. The expense ratio for this ETF is 0.75%, which is reasonable for strategy type ETFs. That fee is downright cheap when compared to the typical 2% management fee and a 20% performance fee for hedge funds. The holdings number about 53 stocks. Get GURU fact sheet here.

The top five holdings for GURU as of 10/17/2013:

Education Management Corp. (NASDAQ:EDMC)

Pandora Media Inc. (NYSE:P)

US Airways Group Inc. (LCC)

Cumulus Media Inc. (NASDAQ:CMLS)

Pioneer Natural Resources Co. (NYSE:PXD)

(NYSEARCA:ALFA) AlphaClone Alternative Alpha ETF

The AlphaClone Alternative Alpha ETF commenced trading on May 30, 2012 and tracks before fees and expenses the AlphaClone Hedge Fund Long/Short Index. This young ETF is somewhat smaller with a market cap of only around $24 million so far. It has a similar strategy to GURU but also has a hedging feature when the market turns sour.

Description of Index:

Here's a summary description from AlphaClone Funds for the AlphaClone Hedge Fund Long/Short Index:

"The AlphaClone Hedge Fund Long/Short Index tracks the performance of US-traded equity securities to which hedge funds and institutional investors have disclosed significant exposure. The proprietary index methodology developed by AlphaClone ranks hedge funds and institutional investors based on the efficacy of replicating their publicity disclosed positions. Equities are selected from those managers with the highest ranking, or "Clone Score". The index is risk managed in that it can vary between being long only and market hedged based on certain rules-driven relative price targets tied to a broad market index."

From AlphaClone - more about the weightings and the hedging strategy below:

  • Weighting method

- Index constituents are equal weighted but have an overlap bias (i.e., securities held by twice the number of managers have twice the weight).

  • Variable market exposure

- the index can vary between being long only and market hedged (50% short exposure to the S&P 500 index using an inverse unleveraged ETF). The hedge is triggered on or off when the S&P 500 crosses its 200 day moving average at any month end.

Performance and Fund Details:

Year to date performance for the ALFA ETF is a respectable 29.8% versus 25% for the S&P 500. The expense ratio for this ETF is 0.95%. Pricey? Yes, but fairly typical for strategy and alternative ETFs; and as pointed out above - cheap in the context of hedge fund fees. The ALFA ETF holds about 83 stocks.

The top five holdings for ALFA as of 10/17/2013:

21st Century Fox Inc. (NASDAQ:FOXA)

Valeant Pharmaceuticals International Inc. (NYSE:VRX)

American International Group Inc. (NYSE:AIG)

Citigroup Inc. (NYSE:C)

Micron Technology Inc. (NASDAQ:MU)

Performance of GURU and ALFA versus S&P 500:

(From June 2012 to Mid October 2013_Yahoo Finance)

(click to enlarge)

GURU and ALFA ETFs versus the S&P 500 _June 5,2012 to October 22,2013

Summary and Opinion:

Because many hedge funds are generally trailing the market this year (so far) many investors expect a rush by hedge funds to improve their year end metrics by goosing high beta momentum stocks to turbo-charge performance for the end of the year.

Perhaps these ETF funds have enough recent replication in those names to power a portfolio to get more of that outperformance. Judging from some of these ETF holdings (such as EDMC up over 250% YTD and VRX up about 100% YTD) an investor may want to fasten his seat belt and be ready for some volatility. Hedge funds will likely ride some of these names further to a strong year end finish. Or, on the other hand, perhaps they will book those huge profits like Carl Icahn prudently did the other day with Netflix (NASDAQ:NFLX).

Either way, both GURU and ALFA will likely reflect much of those market momentum names. Note that with lightly traded funds one should always use limit orders.

Source: 2 Market Beating ETFs Use Holdings From Top Hedge Funds