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.

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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).

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.

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.

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.

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.

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.