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Hedge Funds Top Markets in 2018: ETFs in Focus

Sanghamitra Saha

Last year was the worst for stocks in a decade with rising rates, overvaluation concerns, recessionary fears and trade war concerns bothering the key indexes throughout. The S&P 500 lost about 7.0% for the whole year and even reached the brink of a bear market in December having lost about 10.2%. All-world ETF iShares MSCI ACWI ETF ACWI was off 8.4% in December and 10% in 2018.

In such a situation, Hedge Funds came across as a rising star. The HFRI Macro Index (Asset Weighted) gained 2.1% for December thanks to the positive contributions from both quantitative and trend-following strategies, per data provided by hedgefundresearch.com.

The HFRI Fund Weighted Composite Index (FWC) lost only 1.97% in December, trumping U.S. equities and most global/regional equity indices by over 700 basis points, marking the largest relative outperformance since February 2009, as 93% of HFRI components shattered the S&P 500 for the month.

The HFRI Asset Weighted Composite Index (AWC) fell only 0.68% in December, against the 8.5-12.0% decline in U.S. equities for the month. The index also dropped only 0.8% for the full year of 2018. Both the HFRI FWC and AWC indices outperformed U.S. and global equities for 2018, the sturdiest outperformance since 2008.

Bridgewater: The Winner

Bridgewater — the world’s biggest hedge fund, with $160 billion in assets — breezed past the market last year with 14.6% gain. Its flagship Pure Alpha fund was an outperformer. It has even returned double digits, on average, over its 28-year history. The reason behind the success of Ray Dalio’s hedge fund was the foreseeing of an economic slowdown in 2018, unlike several other Hedge Fund managers.

Bridgewater co-chief investment officer Bob Prince told the Financial Times in October that the economy was at an “inflection point where the economy is moving from hot to mediocre,” as quoted on CNBC.

Against this backdrop, investors must be interested in knowing ETFs that replicate the investing styles and predictions of market gurus.

Global X Guru Index ETF (GURU)

This fund seeks to generate alpha over the broad market by investing in highest conviction ideas from a select pool of hedge funds where the 13F information is most valuable. It follows the Solactive Guru Index, holding 69 stocks in its basket, with none accounting for more than 2.03% of assets. Information Technology (14.74%), Health Care (14.47%), Communication Services (13.51%) and Consumer Discretionary (10.67%) have a double-digit weight in the fund (read: Winning ETF Strategies for 2019).

AlphaClone Alternative Alpha ETF (ALFA)

This fund tracks the AlphaClone Hedge Fund Masters Index. It tracks the performance of U.S.-traded equity securities to which hedge funds and institutional investors have disclosed significant exposure. The fund charges 69 bps in fees.

Validea Market Legends ETF (VALX)

The fund offers exposure to equity securities selected using Validea Capital's proprietary investment system, which is based on the published investment strategies of Wall Street legends. It charges 80 bps in fees.

ProShares Hedge Replication ETF (HDG)

The underlying Merrill Lynch Factor Model - Exchange Series is designed to reflect hedge fund industry performance through an equally weighted composite of over 2,000 constituent funds.In seeking to maintain a high correlation with the HFRI, the benchmark utilizes a systematic model to establish, each month, weighted long or short positions in six underlying factors.

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ISHRS-MSCI ACWI (ACWI): ETF Research Reports
GLBL-X GURU IDX (GURU): ETF Research Reports
PRO-HEDGE REPL (HDG): ETF Research Reports
ALPHACLN-ALT AL (ALFA): ETF Research Reports
VALID-MKT LGND (VALX): ETF Research Reports
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