Hedge Fund “Clone” ETF Debuts (ALFA)

by on June 1, 2012 | ETFs Mentioned:

Exchange-Traded Concepts, the firm providing turnkey solutions to companies looking to make an entrance into the ETF industry, announced this week the debut of a unique product that will seek to clone strategies implemented by hedge funds. The new AlphaClone Alternative Alpha Exchange-Traded Fund (ALFA) will seek to replicate the AlphaClone Hedge Fund Long/Short Index, a benchmark that is constructed based on publicly disclosed positions of hedge funds and institutional investors.

The 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. Clone scores incorporate monthly returns in excess of a broad market index, as well as a fixed hurdle rate over time [sign up for the free ETFdb newsletter].

ALFA will essentially try to mimic the holdings of top hedge fund managers, which are regularly revealed through filings with the SEC. Holdings will be equal-weighted, but it’s possible for securities to be represented more than once if they are found in the portfolio of more than one hedge fund manager.

Global X had sketched out plans for products implementing a generally similar approach earlier this year; that issuer made an SEC filing detailing a proposed Top Hedge Fund Equity Holdings ETF that would hold stocks that are found in the portfolios of a select group of hedge funds. Global X also laid the groundwork for a Top Value Guru Holdings ETF and Top Activist Investor Holdings ETF.

ALFA will also feature a dynamic hedging mechanism that allows the fund to vary between 100% long and 50% long / 50% short the S&P 500. That hedging will kick in based on certain NAV price targets based on the underlying index [see the ALFA fact sheet].

Hedge Fund ETFs In Focus

ALFA is now one of several ETFs available to U.S. investors that is designed to mimic returns of hedge funds. But while the general objectives of these products may appear similar from a high level, they go about accomplishing their strategies in very different ways. Other hedge fund ETFs include:

  • IQ Hedge Multi-Strategy Tracker ETF (QAI): This ETF-of-ETFs combines various asset classes based on current economic conditions with the goal of replicating the risk-adjusted return characteristics of hedge funds. To accomplish its objective, QAI uses various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. Currently, QAI has positions in LQD, BND, AGG, SHY, and SPY.
  • ProShares Hedge Replication ETF (HDG): This ETF is linked to the Merrill Lynch Factor Model — Exchange Series, which establishes long or short positions in six factors: S&P 500, Russell 2000, MSCI EAFE, MSCI Emerging Markets, ProShares UltraShort Euro ETF, and 3-Month Treasury Bills.

ALFA charges an expense ratio of 0.95%. That’s at the high end of the range for the Hedge Fund ETFdb Category, which ranges from 0.45% to 0.95% [see the Cheapskate Hedge Fund ETFdb Portfolio].

Disclosure: No positions at time of writing.