New Hedge-Fund ETF from AlphaClone

AlphaClone launched their first ETF, the AlphaClone Alternative Alpha ETF (ALFA), which began trading on May 31st.

Long-time readers of Scott's Investments will recognize the name AlphaClone. I have periodically back-tested portfolios using their online service, which enable investors to systematically invest in stock strategies derived from the holdings of top managers at the time their stock ideas become public – a process called “cloning.”

One interesting feature of the new ETF, ALFA, is that it hedges its long positions during periods of market weakness. IndexUniverse notes:

The portfolio, which focuses on mitigating downside volatility and reducing overall market correlations, can be anywhere from 100 percent long—selecting long positions from hedge funds' public disclosures—to as much as 50 percent short, depending on market volatility targets the methodology stipulates.

 

For instance, if the S&P 500 Index closes below its 200-day moving average at the end of any month, ALFA turns to a market-hedged position—it goes short—to seek positive returns while offsetting the long exposure to that index.

While I am not so vain as to think I inspired this strategy, it is interesting to see the tests I ran in March 2010 using an almost identical strategy. The custom back-test I ran went 100% long in the top 5 popular stocks in World Beta Clone when the S&P 500 was above its 10 month simple moving average. When the S&P 500 closed below its 10 month SMA, I hedged the portfolio beginning the following month by going 50% short the S&P 500 and holding a 50% long exposure to the 5 stocks in the World Beta Clone. At the time of the test the strategy had not had a down year since 2000.

The ETF sports a .95% expense ratio, somewhat high, so an alternative for those interested in replicating a similar strategy is to use the AlphaClone site.