Battle Of The Hedge Fund Clones: GURU Vs. ALFA

by on October 23, 2012 | ETFs Mentioned:

The proliferation of exchange-traded products has opened up previously difficult-to-reach corners of the investing landscape, allowing for retail investors with online brokerage accounts to access virtually any asset class in an easy, cost-efficient manner. While passive, index-based ETFs have found their way into countless portfolios, many are turning to more innovative funds in search of uncorrelated returns. Hedge fund strategies, which were previously reserved for the wealthy and most sophisticated investors, are now easily accessible through the ETF wrapper [see Free Report: How To Pick The Right ETF Every Time].

The Contenders

In fact, the evolution of the ETF universe has spawned several hedge fund ETFs; currently, the biggest offering in the space is the IndexIQ Hedge Multi-Strategy Tracker EF (QAI), which is structured as a fund-of-funds that looks to replicate a number of strategies like long/short, global macro and market neutral. While this strategy replication approach is by all means appealing, the recent launch of two products, however, brings the world of hedge funds even closer to investors’ fingertips [see also Cheapskate Hedge Fund ETFdb Portfolio].

Meet the Global X Top Guru Holdings Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA). Debuting just a few days apart in 2012, both of these innovative offerings look to provide investors with exposure to a basket of holdings held by top hedge funds. Each underlying portfolio is constructed by using SEC filings; institutional investors with $100 million or more in assets under management are required to make 13F filings within 45 days of the end of each quarter, thereby offerings insights into their strategies.

Where They Fit

While the “hedge fund clone” methodology is certainly appealing for those looking to tap into alternative strategies that potentially generate alpha, this approach is likely far too niche for most investors. Instead, GURU and ALFA can serve as viable tactical tools for those interested in mimicking the portfolios of some of the biggest money managers on Wall Street  [see ETFs To Invest Like Buffett, Paulson, & Fisher].

Under The Hood

GURU is linked to an index consisting of 50 securities deemed to be top holdings of hedge funds according to 13F filings. Furthermore, this benchmark is equal-weighted, meaning that each security represents about 2% of total assets. In terms of sector diversification, technology and financials take the top two spots trailed by industrials; stocks from the telecommunications sector receive minimal exposure in this portfolio.

ALFA’s underlying index includes holdings that are disclosed by managers with the highest “clone score,” a metric that measures the efficacy of following a manager based on their publicly disclosed holdings. This fund is comprised of roughly 80 securities, with top allocations going to Apple, Simon Property Group, Delphi Automotive, Motorola Solutions and Visa. ALFA separates itself from GURU by also featuring a dynamic hedging mechanism that allows the fund to vary between 100% long and 50%/50% short the S&P 500 Index based on certain NAV price targets [see also AlphaClone In Focus: Q&A With Mazin Jadallah].

Keep in mind that the portfolio composition of both GURU and ALFA is bound to change over time given the dynamic nature of their cloning strategies.

Expenses & Performance

With both funds launching in mid-2012, performance analysis is quite limited. In terms of expenses, GURU takes home the cake; this offering from Global X charges 0.75% in expense fees and is available commission-free to E*TRADE and Interactive Brokers account holders. ALFA’s added hedging mechanism comes at a steeper price tag as this ETF charges 0.95% in fees and is not avaible commission-free [try our Free ETF Head-To-Head Tool].

Bottom Line

The approach employed by GURU and ALFA is virtually identical; both ETFs rely on SEC filings to construct their underlying portfolios. GURU distinguishes itself by featuring an equal-weighted portfolio, which allows for investors to tap into the “hedge fund clone” strategy without incurring significant company-specific risk. ALFA on the other hand bases its holdings on a proprietary ranking methodology and also features a dynamic hedging mechanism that may offer valuable protection during exceptionally volatile times. The respective strategies of GURU and ALFA come at different costs, and each one offers a compelling strategy depending on individual objectives and risk preference.

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Disclosure: No positions at time of writing.