New ETFs Copy Hedge Funds


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By Michael Kling, Money News,

Want the return of a hedge fund for the cost of an exchange-traded fund (ETF)?

New ETFs hope to offer that by using public filings to copy hedge fund portfolios, according to Institutional Investor.

Two new ETFs, Global X Funds’ Top Guru Holdings Index ETF (GURU) and AlphaClone’s Alternative Alpha ETF (ALFA) hope to match hedge fund returns by copying the Form 13F filings hedge funds make with the Securities and Exchange Commission.

ALFA, which started trading May 31, has a three-month average annualized return of 9.23 percent. GURU, which debuted in June, has a three-month return of 9.6 percent.
By contrast, the HFRI Fund Weighted Composite Index, which is a benchmark of hedge fund performance for more than 2,000 funds, had a three-month return of 2.5 percent for about the same period.

Of course, judging the funds from their short histories is difficult.

ALFA, unlike GURU, might take short positions as a hedge, which is called a market-neutral strategy.

In addition, IndexIQ’s Hedge Market Neutral Tracker ETF (QMN) replicates the strategies of hedge funds, not their actual positions, by using statistical modeling techniques, IndexIQ CEO Adam Patti told Institutional Investor.

QMN, which just started trading this month, is the only copycat ETF that employs a truly market-neutral strategy, Patti said, which will provide “consistent returns in all market conditions with low volatility.”

Critics of ETF copycats say hedge funds’ quarterly filings are outdated by the time they’re read, according to Institutional Investor. Copycats cannot determine for sure why the hedge fund took a particular position, if it still holds it or what other investment it now holds.

Mazin Jadallah, founder and CEO of AlphaClone, counters that hedge fund positions are longer than generally believed and that their long-position gains produce much of their gains.

Hedge funds are sometimes criticized for being illiquid and charge high fees for uncertain returns, Reuters noted. As a group, hedge funds returned about 5 percent on average through September, while the Standard & Poor’s 500 gained 16.43 percent. Hedge funds charge a performance fee, which can be 20 percent or more, in addition to a management fee.

The TrimTabs Float Shrink ETF (TTFS), an actively managed ETF from AdvisorShares, gained 35 percent since launching last October, according to Reuters.

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