Innovation remains a driving force in the ETF industry as the lineup of tools continues to grow, allowing for mainstream investors to easily access previously difficult-to-reach strategies and corners of the global market. One of the more recent strides towards democratizing the investment process comes in the form of the AlphaClone Alternative Alpha ETF (ALFA). This innovative fund brings together insights from hedge funds and institutional investors in a product wrapper that makes it easy and cost-efficient to invest alongside professional money managers. Mazin Jadallah, founder and CEO of AlphaClone, recently took time out of his schedule to discuss what makes the ALFA ETF unique, the basics behind “cloning”, as well discussing how the strategy might fit into investors’ portfolios.
ETF Database (ETFdb): Explain the basic idea behind ALFA.
Mazin Jadallah (MJ): It’s no secret that many of the best investment ideas come from hedge funds and institutional portfolios. Unfortunately most investors can’t conveniently access these investments. AlphaClone’s mission is to empower investors by giving them efficient access to the investment ideas of established institutional investors and hedge funds. Our research and portfolio construction approach, called “cloning”, allows any investor to gain exposure to the alpha potential reflected in hedge fund and institutional manager public disclosures. As the AlphaClone name indicates, we seek to clone alpha through our proprietary process and make it available to all types of investors.
ETFdb: How might this strategy fit into a portfolio? Would you consider this as a core, or more tactical holding?
MJ: For equity investors, we think ALFA offers more considerable exposure to U.S. equities. On the “long” side it combines up to 100 equities to which established hedge fund managers chosen by AlphaClone have considerable exposure. On the “short” side the strategy employs a dynamic hedge which can vary the strategy from being 100% long during market run-ups to market hedged during protracted market rundowns. In this way it seeks to align itself with a rising market while still offering protection against multi-month corrections in the market.For investors in hedge funds, ALFA is a way for them to achieve daily liquidity in their alternatives portfolio without giving up the potential to generate outperformance or alpha. Prior to ALFA, hedge fund allocators have had to rely on either weekly or monthly liquidity products or beta factor replication products.
ETFdb: Why does it make sense to use the ETF wrapper for investors looking to purse this sort of strategy?
MJ: We founded the company in 2008 as a research firm and then in 2010 we began offering core investment strategies inside separate accounts. Based on demand from our clients, we now are expanding access to our research by giving investors the convenience, liquidity and transparency that ETFs can deliver. The Alternative Alpha Fund ETF seeks to track the AlphaClone’s Hedge Fund Long/Short Index before fees and expenses and delivers our expertise at manager selection, portfolio construction and risk-management in a tax-friendly vehicle that is publicly traded.
ETFdb: There are some out there who believe ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?
MJ: Innovation is key in any industry. If anything we see a need to accelerate innovation in the investment industry. Specifically, ETFs have been a boon for investors of all types. They give investors and their advisors direct access to more and more finely defined beta exposures on the one hand but also now offer access to intelligent rules-based investment models like ours. The transparency, low cost and accessibility of these products offer benefits that accrue directly to the end investor. Going forward we hope to see continued innovation around the ETF vehicle itself as well as in the types of investment disciplines offered.
Bottom Line: the ETF wrapper continues to evolve in ways that both issuers and investors can take advantage of. ALFA presents itself as a viable instrument that makes it easy, and cost-effective, for investors of all styles and experience levels to tap into the portfolio strategies of professional money managers.
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Disclosure: No positions at time of writing.
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