By Ashley Lau
NEW YORK Feb 21 When big name U.S. hedge fund
managers disclosed their fourth-quarter stock holdings last
week, a couple of exchange-traded fund companies took particular
Global X Funds and AlphaClone LLC both offer ETFs that mimic
the stock picks of high-priced hedge funds. When the hedges
publish their long positions, these companies jump in, making
sure the same holdings are in their much more affordable ETFs.
This approach won them outsized returns in 2013 and has
emboldened expansion; New York-based Global X already plans to
launch two similar funds in coming weeks, as soon as they clear
"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.
The Global X Guru fund was up 47 percent in 2013, a
year when the average hedge fund returned 9.3 percent. San
Francisco-based AlphaClone's Alternative Alpha ETF
gained 36.12 percent.
But it is not clear how such funds, which benefited from a
strong stock 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, which traded at $25.25 on
the NYSE Arca on Friday, is down about 2 percent, and the
AlphaClone fund, which traded at $39.60 on the NYSE Arca, 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
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.