The latest company to take advantage of Exchange-Traded Concept’s ‘turnkey’ ETF service appears to be Milwaukee-based AlphaClone. The company recently launched a new product that is the first of its kind to replicate disclosed equity positioned held by established hedge fund managers, the AlphaClone Alternative Alpha ETF.
In essence, the firm looks to give every day investors the ability to capture alpha from long positions in these investments while also protecting against market downturns via a dynamic hedge. The product currently trades under the symbol ALFA and charges investors 95 basis points a year for its services (read Mid Cap ETF Investing 101).
AlphaClone Strategy In Focus
The new ETF looks to track, before fees and expenses, the AlphaClone Hedge Fund Long/Short Index. This benchmark tracks the performance of US-traded equities to which hedge fund and institutional investors have disclosed significant exposure. This process is done via what the company calls the ‘Clone Score’ methodology which looks to evaluate the ability of AlphaClone to replicate the positions, selecting firms to match that are scored highly in this regard.
This figure is recalculated twice a year and also includes how much alpha following a certain manager’s position generates over a time period. With this approach, AlphaClone looks to provide a consistent strategy to manager and equity selection in its portfolio (see The Complete Guide to Preferred Stock ETF Investing).
Beyond this, investors should also note that the index also employs a hedging mechanism which looks to dull the impact of long bear market periods. Over time, this can range from being 100% long to a 50% long/50% short strategy, hoping to eliminate some level of market risk from the portfolio.
Lastly, investors also should realize that the portfolio looks to rebalance on a quarterly basis. Securities are equally weighted but if a number of top ranked managers have the same stock in their portfolio than that security will receive an outsized weight in the index and thus the ETF portfolio (read 11 Great Dividend ETFs).
At time of writing, this produced a diversified portfolio although many securities were concentrated in the large cap segment. Top holdings include Apple, Express Scripts, Simon Property Group, Intel, and Pepsi.
This strategy could prove popular for investors seeking a hedge-fund like strategy with the relative cheapness and liquidity that comes in an ETF. Furthermore, the index methodology may be appealing to some as it helps to keep costs lower than what many investors see in actively managed ETF products.
Nevertheless, while the product may be the first to market in the space, it is not without competition in the broad hedge-fund ETF sphere. In particular, ALFA could face some stiff competition from MCRO and QAI.
These two products, from IndexIQ, look to give investors broad exposure to hedge fund-like strategies in ETF form as well. However, instead of tracking institutional investors and asset inflows, these products engage in a more global strategy which looks to apply a variety of hedge fund techniques (see Does Your Portfolio Need A Hedge Fund ETF?).
This approach has proven to be quite popular with many investors as combined, the two ETFs have amassed nearly $250 million in assets. This has helped both of the products to amass solid trading volumes, ensuring that costs in these products are less than ALFA.
Still, for investors seeking to match hedge fund techniques in ETF form without using a fund-of-funds approach, ALFA is one of the best options available. While Global X is also fresh out with some hedge fund tracking ETFs of its own, ALFA could prove to be an interesting pick for those intrigued by the company’s proprietary CloneScore and how this technique can be used in ETF form.
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