Hedge Funds always arouse interest and shine with glamor, as there are, undoubtedly some top-notch hedge funds, keep delivering splendid returns to their investors year over year. However, mass investors are shielded from directly investing their money into hedge funds due to a high wealth threshold set forth by the law. With more rigorous regulation, nowadays, the SED mandates hedge funds to file 13-F etc. reports of their holdings and change of holdings, making it possible to not only know hedge fund managers’ stock views but also to aggregate and compute the most densely held stocks by hedge funds on a time-lagging basis. Hence, there are a couple of this kind of copycat ETFs created in the market. ALFA, GURU, and GVIP are some of them.
ALFA is benchmarked to AlphaClone Hedge Fund Downside Hedged index, issued by AlphaClone LLC and is calculated and distributed by Solactive AG. Launched in May 2012, this fund has so far amassed $30 million. The expense ratio is relatively high, 0.95% and the average spread is 0.19%.
AlphaClone maintains a database of hedge fund and institutional investor public holdings disclosures. The database is comprised of approximately 550 hedge funds and institutional investors who are required to file form 13F-HR with the SEC. The universe of securities eligible for inclusion in the index includes all equity securities disclosed by AlphaClone’s universe of managers for the most recent quarter and traded on a US national securities exchange. On the Selection Day, AlphaClone selects up to 100 constituents derived from the eligible universe of securities. Constituents are selected from the public disclosures of managers that have the highest “Clone Score”, a proprietary measure developed by AlphaClone that measures the efficacy over time of investment or “clone” strategies that follow a specific manager’s holdings. Clone Scores are based on the monthly returns in excess of a broad market index and a fixed hurdle rate exhibited by the manager’s “clone” strategies over time. Clone Scores are recalculated bi-annually. (Reference AlphaClone Hedge Fund Downside Hedged Index Methodology)
An obvious question will come up – hedge fund portfolio usually is composed of long positions and short position, how does this replication index deal with the short part?
Therefore, resolve by AlphaClone is a design oscillating between being long only and market hedged. The hedge is triggered on (off) when the S&P 500 closes below (above) its 200 days simple moving average at any month-end. When the index is hedged, it remains long its holdings and shorts the S&P 500 index in an amount equal to the index’s long positions on the day the hedge takes effect. When the hedge is in effect over multiple months, it is only rebalanced quarterly simultaneous with the rebalance of the index’s long positions.
Now look at GURU, regarded as a twin product to ALFA, also launched in the middle of 2012, with a $56.42 million AuM as of early 2017. Its expense ratio is 0.75%, 200 bps lower than ALFA.
The Top Guru Holdings Index is issued, calculated and distributed by Structured Solutions AG. It tracks the price movements of the top U.S. listed equity holdings of a select group of Hedge Funds based on the quarterly regulatory filings from the SEC, same as ALFA.
The Selection Pool consists of each “Top Holding” of each hedge fund out of the “Hedge Fund Pool” according to the latest quarterly regulatory filings reported to the SEC (“13F Filings”). The “Hedge Fund Pool” is selected from the “Hedge Fund Universe” once a year on the last Business Day of January on the “Hedge Fund Selection Day” by applying rules and remains unaltered until the next Hedge Fund Selection Day.
If a Hedge Fund holding was an Index Component during the last quarter but is not part of the new Selection Pool, it remains in the index even if it is not a Top Holding anymore but ranks second or third by market value and accounts for at least 4.8% of the total hedge fund market value. Index Component of the Top Guru Holdings Index is weighted equally. (Referencing Guru Holdings Index methodology)
Let’s compare the performance and holdings between GURU and ALFA.
Both GURU and ALFA outperformed the S&P500 in their first three years since the inception, then they took a plunge afterward, and recouped some performance back within six months or so, but nevertheless, both of them had since then been down performing relative to the market proxied by S&P500. Accordingly, their AuM shrank significantly from hundreds of millions to only roughly one-tenth of their peak.
ALFA and GURU lines were closely tangled, while ALFA showed more fluctuation than GURU, which can be partially explained by their weighting schemes – GURU applies an equal weighting, while ALFA uses conviction score weighting scheme.
Goldman Sachs Hedge Industry VIP ETF, GVIP, is also worth mentioning in this realm. It was launched in September 2016 by Goldman Sachs Asset Management L.P., poised to penetrate and compete in the ETF arena in recent years. GVIP is based on the Goldman Sachs Hedge Fund VIP Index.
This index has a base universe starting with common stocks and ADRs that are listed on a U.S. exchange. To screen, those entities that have filed Form 13F with the U.S. Securities and Exchange Commission (SEC) and are primarily characterized as “hedge fund managers”. Further criteria are imposed that positions reported in their most recent 13F filings are in a range of 10 and 200, so activism or quantitative types of hedge fund managers are excluded. In addition, fund with less than $10 million of AuM and reported holding dates other than the previous calendar quarter end are also excluded.
Equity positions reported by hedge fund managers are ranked by descending market value, then those ranked in top 10 for each manager, and only those primary and liquid equities are included. The 50 stocks that appear most frequently in the resulting screened list of the top 10 holdings of the Hedge Fund Manager Universe are selected as Index constituents. In the case of a tie in ranking, stocks will be included based on their ticker in an alphabetical order. Index constituents will exclude names that GSAM is restricted from holding for legal or regulatory reasons.
The 50 Index Constituents are equal dollar-weighted at each Selection Date and allowed to float by performance until the next Rebalance Date. (Reference Goldman Sachs Hedge Fund VIP Index Methodology)
As a new incomer to the market, GSAM cuts the expense ratio to 0.45%, less than the half of ALFA’s 0.95%. Certainly, it helps GVIP get asset shares from ALFA and GURU, but this Hedge Fund Copycat strategy didn’t pan out, so far, GVIP only accumulated about $30 million AuM.