3 ETFs To Invest Like A Hedge Fund Pro

George Soros 2012

18 Aug 3 ETFs To Invest Like A Hedge Fund Pro

Do you fancy the stories of hedge funds making headlines of their big wins?

If you are not a big time investor, you could only drool on the profits as most of these hedge funds serve the very rich around the world.

What if there are ways to participate in small amounts as a retail investor? Would you be interested?

Here’s what this article is about – to show you how to it by using Exchange Traded Funds (ETFs).

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Not in order of merits, here’s the list.

1) Direxion iBillionaire Index ETF (IBLN)

Raul Moreno and Alejandro Estrada launched the iBillionaire smart phone app in April 2013 and within less than a year, created the iBillionaire Index which is based on a methodology prescribed below.

First, the methodology selects a group of billionaires who have built their fortunes in hedge funds and investing. You should be able to spot some familiar names in the picture below.

iBillionaire Investors

Second, the methodology identifies top 30 S&P 500 stocks that are accumulated by billionaire investors each quarter based on regulatory U.S. Securities & Exchange Commission (SEC) filings. The stocks are equally weighted, each at about 3.33% of the portfolio.

  1. Alphabet
  2. Apple
  3. Abbvie
  4. Allergan
  5. Amgen
  6. Baxter
  7. Consolidated Energy
  8. Delta Air Lines
  9. Dow Chemical
  10. Ebay
  11. Endo International
  12. General Motors
  13. Goodyear Tire & Rubber
  14. HCA
  15. Starwood Hotels & Resorts
  16. Humana
  17. Mastercard
  18. Mohawk Industries
  19. Monsanto
  20. Microsoft
  21. Micron Technology
  22. Netflix
  23. Priceline
  24. Perrigo
  25. Thermo Fisher Scientific
  26. Time Warner
  27. Walgreens Boots Alliance
  28. Whirlpool
  29. Williams
  30. Yum! Brands

The stocks are rebalanced quarterly and the list of billionaires is revised and updated annually.

The Index while useful, is not investible directly. A fund management company, Direxion, made it possible to invest by creating an ETF for it. I noticed the holdings and weightage of the stocks are different between the ETF and the Index. There are bound to be large tracking error in this case.

The expense ratio for the ETF stands at 0.65%, which is still acceptable. The Fund size is small at US$17.2m, and there are no economies of scale for the cost to be brought down.

It definitely sounded good to be able to piggyback on super investors at such cost and effort. We expect the Gurus to do better since they are the best in the world, but the results were rather disappointing. The ETF under-performed the S&P 500 since its inception in late 2014 – see the chart below. Big names do not mean big gains.


Chart from tradingview.com Orange line represents the S&P 500 while the blue line represents the iBillionaire ETF.

2) Global X Guru Index ETF (GURU)

The stock ticker is so cool, ‘GURU’! This ETF aims to replicate the Solactive Guru Index. The Index tracks the price movements of the top U.S. listed equity holdings of a select group of Hedge Funds based on the quarterly regulatory filings from the SEC. The Hedge Funds must have a size of at least US$500m.

The list of stocks are as follow and they are equally weighted in the index.

  1. Allergan
  2. Alphabet
  3. Amazon
  4. AIG
  5. American Tower
  6. Apple
  7. Baidu
  8. Bank of New York Mellon
  9. Berkshire Hathaway B
  10. Broadcom
  11. CBS B
  12. CDK Global
  13. Celanese
  14. Cheniere Energy
  15. Cigna
  16. Constellation Brands
  17. Crown Castle
  18. Darling Ingredients
  19. Dycom Industries
  20. EMC
  21. Energy Transfer Partners
  22. Facebook
  23. FirstEnergy
  24. Fleetcor Technologies
  25. Horizon Pharma
  26. Houghton Mifflin Harcourt
  27. Humana
  28. Incyte
  29. Investors Bancorp
  30. JPMorgan Chase
  31. MacQuarie Infrastructure
  32. Microsoft
  33. Mondelex International
  34. Netflix
  35. Nike
  36. NVR
  37. Orbital ATK
  38. Pandora Media
  39. Pioneer Natural Resources
  40. Sears
  41. Signet Jewelers
  42. Spirit Aerosystems
  43. Tribune Media
  44. Western Union
  45. Yahoo!
  46. Yum! Brands
  47. Zoetis

While Solactive AG (German company) is the owner of the Index, Global X (U.S. company) is the issuer for the ETF. The expense ratio is 0.75% and the Fund size is US$79m. This ETF is 6 times larger than the iBillionaire ETF which shows more popularity. The reason could be that this ETF had a 2-year head start than the iBillionaire ETF, starting in 2012.

Another reason could also be that the Global X Guru Index ETF was doing very well within the first two years of inception, beating the S&P 500 index increasingly. However, the ETF corrected heavily in end 2015 and now it is lagging the S&P 500 Index.

GURU vs S&P 500

Chart from tradingview.com Orange line represents the S&P 500 while the blue line represents Global X Guru Index ETF.

3) AlphaClone Alternative Alpha ETF (ALFA)

The close cousin to GURU is the AlphaClone Alternative Alpha ETF. Both ETFs launched about the same time and their performance were largely similar – performing well in the first two years before lagging the S&P 500.

ALFA vs S&P 500

Chart from tradingview.com Orange line represents the S&P 500 while the blue line represents AlphaClone Alternative Alpha ETF.

The expense ratio at 0.95% is too expensive for my liking. The Fund size is around US$57m which is about 30% smaller than GURU.

The ETF aims to replicate the AlphaClone Hedge Fund Downside Hedged Index. You would have noticed that both the Index and ETF were created by the same company, AlphaClone.

500 hedge funds are rated based on the Clone Score – a proprietary scoring method developed by AlphaClone.

The Index constituents are equal weighted but have an overlap bias (i.e., securities held by twice the number of managers have twice the weight). The list of stocks at the time of writing were:

  1. Abiomed
  2. Aetna
  3. Alphabet
  4. Amazon
  5. Amgen
  6. Angies List
  7. Anheuser Busch InBev
  8. Apple
  9. Atricure
  10. Autodesk
  11. Baxter
  12. Celgene
  13. Cigna
  14. Cimpress
  15. Constellation Brands
  16. Credit Acceptance
  17. Eagle Materials
  18. Facebook
  19. General Dynamics
  20. Gilead Sciences
  21. Goodyear Tire & Rubber
  22. GTT Comms
  23. HCA
  24. Herc
  25. Hertz Global
  26. Home Depot
  27. Horizon Pharma
  28. Humana
  29. Incyte
  30. Interactive Brokers
  31. Intuitive Surgical
  32. Johnson & Johnson
  33. Johnson CTLS
  34. LabCorp
  35. Lazard
  36. Lennar
  37. Lilly Eli & Co
  38. Medtronic
  39. Microsoft
  40. NVR
  41. NXP Semiconductors
  42. Pfizer
  43. Pioneer National Resources
  44. Procter & Gamble
  45. Qlik Technologies
  46. Ross Stores
  47. Sabre
  48. Sasol
  49. Sealed Air
  50. Sherwin Williams
  51. Signet Jewelers
  52. Simon Property
  53. Spirit Aerosystems
  54. Transdigm
  55. United Continental
  56. Universal Health Services
  57. Viacom
  58. Visa
  59. Walgreens Boots Alliance
  60. Wave Life Sciences
  61. Web Com
  62. Western Union
  63. Willis Towers Watson
  64. Yahoo!
  65. Zimmer Biomet

Lastly, the Index also have a hedging mode which would be turned on when the S&P 500 closes below its 200-day simple moving average at any month end. When the Index is hedged, it remains long its holdings but shorts the S&P 500 index in an amount equal to the index’s long positions.

Should You Invest? Which to Choose?

Intuitively, it makes sense to copy the top investors in the world but the short history has shown that the hedge funds in general are still unable to beat the S&P 500. As such, it might take a lot more convincing and faith to pick one of these funds as oppose to the plain vanilla S&P 500 ETF.

But if you would like to allocate part of your capital to one of these ETFs, which should you choose?

You should look at a few factors such as expense ratio, performance, issuer quality and fund size. Comparatively, IBLN is the cheapest among the three, but GURU topped in performance, issuer quality and fund size. Performance and size factors have been addressed above.

Issuer quality wise, I simply rated Global X the best of the three because the Company had the largest Assets Under Management (AUM) of US$3.2 billion compared to the other two issuers. A stronger issuer would have a higher probability of longevity and survivability of her funds.


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