Market Overview

Using ETFs To Run Your Own Hedge Fund


Broadly speaking, hedge funds have not been attracting the best press over the past few years. Simply put, the overall performance has not been strong enough to justify the high fees fund managers charge.

Still, investors are drawn to hedge funds and some managers, such as Bill Ackman, David Einhorn and Daniel Loeb, are afforded celebrity status by the financial media. A growing number of exchange traded funds give investors access to some of the most widely-held hedge fund stocks and the advantage is investors merely pay a brokerage fee to buy and sell the fund along with the ETF's annual fee (if they hold the fund for at least a year), all of which is more affordable than the 2 percent and 20 percent hedge funds are notorious for charging.

Among these so-called guru ETFs is the aptly named Global X Guru Index ETF (NYSE: GURU). The $224.3 million GURU tracks the Solactive Guru Index, a benchmark that provides exposure to stocks that frequently appear in the 13F filings of marquee hedge funds.

“The ETF is comprise of the top US listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and concentrated holdings,” said S&P Capital IQ in a recent note.

No stock accounts for more than 2.8 percent of GURU's weight and the ETF's top 10 holdings are currently littered with Ackman favorites including Mondelez International Inc. (NASDAQ: MDLZ) and Valeant Pharmaceuticals Inc. (NYSE: VRX).

GURU is reflective of hedge funds' support for consumer discretionary stocks over the past few years as that sector was the ETF's largest at the end of the second quarter with a weight of 22.3 percent. Technology was GURU's third-largest sector weight at that time behind discretionary and financial services, but that weight could be coming down because, as S&P Capital IQ notes, hedge funds trimmed tech exposure in the second quarter.

GURU's main rival is the $204.2 million AlphaClone Alternative Alpha ETF (NYSE: ALFA), an ETF that carries a five-star rating from Morningstar.

AlphaClone's proprietary 'Clone Score' methodology aggregates on a quarterly basis the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures,” said S&P Capital IQ.

ALFA is home to some Carl Icahn favorites, including Apple Inc. (NASDAQ: AAPL) and Biogen (NASDAQ: BIIB). Valeant Pharmaceuticals is ALFA's second-largest holding behind Apple with both stocks commanding weights of just over 7 percent.

ALFA has been the better performer this year, but GURU is less expensive with an annual fee of 0.75 percent compared to 0.95 percent on ALFA.


Related Articles (ALFA + GURU)

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