| NEW YORK
NEW YORK Feb 21 Small investors who have longed
to benefit from the brains of top hedge fund managers can now
purchase those same stock picks without paying hefty fees or
tying up a large amount of money.
The catch is that Global X Funds and AlphaClone LLC's
exchange-traded funds are essentially mirroring top hedge fund
holdings without the day-to-day hedging that is supposed to
provide a cushion.
When certain top hedge managers buy a stock, New York-based
Global X and San Francisco-based AlphaClone do, too, though with
a lag that some critics say could be costly.
Still, returns from both funds last year far exceeded those
of the hedge fund industry as a whole.
AlphaClone's Alternative Alpha ETF was up 36.12
percent in 2013, a year when the average hedge fund returned 9.3
percent. And the Global X Guru fund gained 47 percent.
"If you know what every large investor in the U.S. owns in
his portfolio on a quarterly basis, there is value in that
information," said Global X head Bruno del Ama, who is planning
to introduce two similar funds in coming weeks, as soon as they
clear regulatory approval.
But it is not clear how such funds, which benefited from a
strong market last year, will perform in more-volatile or down
times, when hedge funds might be expected to fare better.
The ETFs build their stock lists from the 13F reports hedge
funds must file with the U.S. Securities and Exchange Commission
45 days after the end of each quarter. The hedge fund therefore
buys a stock much earlier than the ETF and does not generally
disclose why it did so or how long it plans to hold the
By the time an ETF has bought a stock, the hedge fund may
have already sold its position, or the shares may have moved up
substantially from the hedge fund's purchase price.
Furthermore, the Global X ETFs are designed to use only a
part of the hedge equation: buying the long bets of a carefully
constructed portfolio without protective hedges like short
positions in offsetting derivatives.
"What you end up with is a fairly different entity" from a
hedge fund, said John Rekenthaler, vice president of research at
Chicago-based Morningstar. While an ETF is low-cost, liquid and
transparent, "you give up quite a bit when you're looking at
filings, which is old information, and long-only information."
CHIPS AND DRUGS
The Guru fund's biggest bets are on Netherlands-based NXP
Semiconductors NV and Micron Technology Inc, two
companies that have been popular with hedge managers. Top
holdings in the Alternative Alpha ETF are Canada-based Valeant
Pharmaceuticals International Inc and New York-based
American International Group Inc.
So far this year, the Guru fund is down about 2 percent, and
the AlphaClone fund is up about 4 percent. The Standard & Poor's
500 stock index is down about 1 percent, and the HFRI
Fund Weighted Composite Index, a broad hedge fund industry
measure, has fallen about 0.5 percent.
The ETF managers boast that their fees are much lower than
those charged by hedge funds, which also often require certain
"We wanted to be as accessible as possible," says AlphaClone
founder Mazin Jadallah.
Annual management fees are 0.75 percent for the Guru fund
and 0.95 percent for Alternative Alpha, compared with 2 percent
plus additional performance fees for the typical hedge fund. But
the ETFs are probably more like traditional actively managed
stock mutual funds, whose annual fees average about 0.77
percent, according to a 2013 report from the Investment Company
The success of the Guru ETF, which has amassed some $563.6
million in assets since its inception in June 2012, and client
demand have prompted Global X to offer two new copycat funds as
soon as the U.S. Securities and Exchange Commission signs off on
them. One will focus on shares of small companies, and another
will include international stocks.
The firm uses added filters when choosing which hedge fund
holdings to include in its ETF. For example, it excludes hedge
funds that report less than $500 million in holdings or that
have high turnover rates for their equity positions.
Whether the new ETFs will gain the same level of investor
interest that the Guru and Alternative Alpha funds did in 2013
remains to be seen.
AlphaClone has not yet announced plans for any new ETFs.
Early investors in the Guru ETF were primarily retail
investors, but del Ama said he expected more institutional
clients to take an interest as the ETFs gain more assets.
The London Pensions Fund Authority may invest in the Guru
fund, Chief Investment Officer Alex Gracian said.
"It gives you more diversification in terms of strategy type
at a lower cost," said Gracian, who oversees nearly 5 billion
British pounds (about US$8.3 billion) of pension funds. He said
he might use the ETF to replace another long-only investment.