Apple, Qualcomm, Microsoft Supercharge Most Popular Hedge Fund Technology Clone

Includes: AAPL, MSFT, QCOM
by: AlphaClone

by Maz Jadallah

Here's an interesting fact. AlphaClone's Sector Picks:Technology fund group is one of the most viewed by our members. Specifically, this group's Top 1 Popularity clone.

For the uninitiated, Sector Picks groups clone the collective intelligence amongst hedge funds for a specific industry sector. So the Top 1 Popularity clone for Sector Picks Technology invests quarterly in the most popular technology holding amongst hedge funds in our database. So why is this clone one of the most viewed? It could be because the clone returned 63% in 2008 (yes, 2008), is returning 60% YTD this year and has returned 19.5% annualized since 2000, that is 28 annualized percentage points better than the S&P 500 Information Technology Index.

How the heck did it return such stellar performance in 2008? Here's what the clone held throughout 2008:

As you can see from the trades above, the clone essentially holds technology blue chip companies and traded out of QCOM and into first AAPL, then MSFT, and back to QCOM again. Both the "sell" and "buy" decisions turned out to be pretty stellar. This year the clone held QCOM until 8/21/2009 and then switched into AAPL at a $169/share rebalance price. AAPL is trading at over $200 currently.

Blind luck? Here's what the clone did in every year since 2000 vs. the S&P 500 Information Technology Index:

During the dot com blood-bath, the clone returned over 120% in excess returns from 2000 to 2002! How did it do that? During that bloodiest part of that period, the clone was in cash. This happens when the security specified by the clone strategy for a given period is acquired or is delisted prior to the clone rebalance date, but AFTER the end of the most recent calendar quarter.

Still not convinced, we were curious to test the notion that this clone's performance was simply an "outlier", a per chance occurrence that looks good in retrospect. We looked at other Sector Picks groups, specifically their Top 1 Popularity clones to see how other "single holding" sector clones performed against their respective indexes. We found the Consumer Non-Cyclical Top 1 Popularity clone returned 16 percent annualized since 2000, beating its index by 13 percentage points annualized. The Transportation Top 1 Popularity clone returned 14.4% annualized since 2000, beating its index by 10.4 percentage points. The Materials, Services, Energy and Healthcare clones all beat their indexes as well.

Still not satisfied, we decided to have a look at our Sector Picks groups from exactly the opposite angle offered by a "single holding" clone. As you know, "single holding" clones are inherently volatile so we decided to see if there was significant outperformance amongst Sector Pick clones that held hundreds of positions each quarter.

Specifically, we looked at each Sector Picks Top 5 Holdings clone. That clone holds the five largest sector holdings from each fund in the Sector Picks group (177 hedge funds). That's a lot of holdings attributed to a single sector and should certainly diversify away the performance due to any "single" holding. Here are the results which speak (very loudly) for themselves:

For those of you who think that the only way to have benefited from the above performance was to have selected the right sector clones at the right time - an equal weighted portfolio of all eleven Sector Picks Top 5 Holdings clones returned about 8% annualized since 2000 vs. negative 1 percent for the S&P 500 Total Return index. How are the Top 5 clones performing YTD? The clones beat in 11 out of 11 sectors (see table below).

Sectorpicks_top5_ytd One final note - given the performance above and the fact that these clones hold hundreds of positions quarterly (which makes it hard to trade the clones in individual accounts), we think our Sector Picks Top 5 Holdings clones are perfect as a series of ETFs. We're speaking to ETF "manufacturers" about this concept now but if anyone out there in ETF land wants to chat - drop us a line.