ETFs cash in by copying hedge fund stock picks, but some see risks

Fri Feb 21, 2014 11:52am EST
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By Ashley Lau

NEW YORK Feb 21 (Reuters) - Small investors who have longed to benefit from the brains of top hedge fund managers can now purchase those same stock picks without paying hefty fees or tying up a large amount of money.

The catch is that Global X Funds and AlphaClone LLC's exchange-traded funds are essentially mirroring top hedge fund holdings without the day-to-day hedging that is supposed to provide a cushion.

When certain top hedge managers buy a stock, New York-based Global X and San Francisco-based AlphaClone do, too, though with a lag that some critics say could be costly.

Still, returns from both funds last year far exceeded those of the hedge fund industry as a whole.

AlphaClone's Alternative Alpha ETF was up 36.12 percent in 2013, a year when the average hedge fund returned 9.3 percent. And the Global X Guru fund gained 47 percent.

"If you know what every large investor in the U.S. owns in his portfolio on a quarterly basis, there is value in that information," said Global X head Bruno del Ama, who is planning to introduce two similar funds in coming weeks, as soon as they clear regulatory approval.

But it is not clear how such funds, which benefited from a strong market last year, will perform in more-volatile or down times, when hedge funds might be expected to fare better.

The ETFs build their stock lists from the 13F reports hedge funds must file with the U.S. Securities and Exchange Commission 45 days after the end of each quarter. The hedge fund therefore buys a stock much earlier than the ETF and does not generally disclose why it did so or how long it plans to hold the investment.   Continued...