Breaking Down the New Hedge Fund ETFs

ETF Trends

Global X and AlphaClone recently rolled out ETFs designed to mimic the buying patterns of top hedge fund managers.

Skeptics have voiced concerns about the ability of a rules-base index to successfully replicate hedge-fund tactics. Proponents say hedge fund ETFs give investors access to these complex strategies with lower fees and no lock-up periods. [If You Don't Understand How an ETF Works, Don't Buy It]

“ Global X Top Guru Holdings Index ETF (GURU - News) tracks an equal-weight index that uses a proprietary methodology that compiles the highest-conviction ideas held by large hedge funds with more than $100 million in assets. Under U.S. securities law, hedge funds containing more than $100 million in assets are required to publicly disclose their holdings,” Robert Goldsborough wrote in a recent Morningstar article. [Global X Launches Hedge Fund Replication ETF]

The ETF is a portfolio of 50 stocks from qualifying hedge funds; requirements of hedge funds that are reviewed include a large allocation to U.S. equities, a top holding that take up at least 5% or more of the portfolio and low turnover.The each qualifying hedge funds’ top holding goes into the GURU portfolio, reports Abram Brown for Forbes. [New Hedge Fund Replication ETF]

The fund’s top holding is Nationstar Mortgage Holdings and has holdings that vary from consumer discretionary to technology and financials.

This launch follows that of AlphaClone Altertnative Alpha ETF (ALFA - News) , which is a passively managed fund that employs the same methodology of GURU. However, ALFA also equally weights its holdings but with an overlap bias, so holdings with twice the number of holders gain twice the weight, reports Goldsborough.

The idea to give individual investors the same investment opportunity that wealthier hedge fund managers have access to is the intention. GURU charges 0.75%, which is much more affordable than the typical 2% management fee and 20% performance fee that a hedge fund charges.

The financial result of a hedge fund can be a mirage, due to the fact that once GURU gains the information about public holdings of a certain fund, the hedge fund has long been in position of them. There is about a 45-day lag time between the hedge fund and the ETF.

Tisha Guerrero contributed to this article.

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