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Who wants to beat a millionaire? Who wants to beat a millionaire?
(35 minutes later)
Follow the leader is a fun game to play in the backyard when you’re a kid, but now that we’re all adults and investors, we're still playing it in the stock market.Follow the leader is a fun game to play in the backyard when you’re a kid, but now that we’re all adults and investors, we're still playing it in the stock market.
Hedge funds are the most powerful investors on Wall Street. The biggest of those funds, which invest money for rich private investors and pension funds, manage billions of dollars and are so assured of their brilliance that they between 20% and 50% of the profit they make for investors as fees. Hedge funds are the most powerful investors on Wall Street. The biggest of those funds, which invest money for rich private investors and pension funds, manage billions of dollars and are so assured of their brilliance that they take between 20% and 50% of the profit they make for investors as fees.
No wonder that, over the last few years, there has been a growing array of “hedge fund lite” investment products designed to replicate what veteran hedge fund managers do -- but are aimed at ordinary investors like you and me. Some are simply copycats, mimicking a variety of hedge fund investment strategies but removing some kinds of risk in investments known as hedged mutual funds. No wonder that, over the last few years, there has been a growing array of “hedge fund lite” investment products designed to replicate what veteran hedge fund managers do – but are aimed at ordinary investors like you and me. Some are simply copycats, mimicking a variety of hedge fund investment strategies but removing some kinds of risk in investments known as hedged mutual funds.
And then there’s the 18-month old Guru Index ETF, whose creators want to piggyback on the best ideas of what they view as the best traditional hedge fund managers, or “gurus”. They do this by tracking 13F filings – the forms that every investment manager with more than $100 million in assets has to submit to regulators within 45 days of the end of a quarter, breaking down the details of their investments. They figure that monitoring which stocks hedge fund “gurus” like David Einhorn like - and buy - most, it’s possible to build a “best of the best” index. And then there’s the 18-month old Guru Index ETF, whose creators want to piggyback on the best ideas of what they view as the best traditional hedge fund managers, or “gurus”. They do this by tracking 13F filings – the forms that every investment manager with more than $100m in assets has to submit to regulators within 45 days of the end of a quarter, breaking down the details of their investments. They figure that monitoring which stocks hedge fund “gurus” like David Einhorn like – and buy – most, it’s possible to build a “best of the best” index.
The problem? There are two: The nature of those 13F filings, and the nature of gurus. The problem? Well, there are two: the nature of those 13F filings, and the nature of gurus.
It's not easy to reverse engineer what big investors are really thinking when they're buying and selling stocks; looking at a federal filing to figure out investments is like looking at a paper inventory list of clothes from the GAP and deciding what will look best on you. “If (piggybacking on 13F holdings) was a great strategy, you’d have lots of funds of this kind out there already,” says one hedge fund manager. It's not easy to reverse engineer what big investors are really thinking when they're buying and selling stocks; looking at a federal filing to figure out investments is like looking at a paper inventory list of clothes from the Gap and deciding what will look best on you. “If [piggybacking on 13F holdings] was a great strategy, you’d have lots of funds of this kind out there already,” says one hedge fund manager.
The concept “wouldn’t pass muster with us,” regardless of how impressive the returns might be, says Harold Evensky, an independent financial advisor, whose Florida-based firm, Evensky & Katz, has clients nationwide. The concept “wouldn’t pass muster with us”, regardless of how impressive the returns might be, says Harold Evensky, an independent financial advisor, whose Florida-based firm, Evensky & Katz, has clients nationwide.
The risk, of course, is that the returns alone might make other folks close their eyes to some of the problems. The Guru Index ETF – an exchange-traded fund whose assets and performance are tied to that of a custom-designed index – soared 47.2% last year, compared to the total return of 32.2% for the S&P 500 index. The risk, of course, is that the returns alone might make other folks close their eyes to some of the problems. The Guru Index ETF, an exchange-traded fund whose assets and performance are tied to that of a custom-designed index, soared 47.2% last year, compared to the total return of 32.2% for the S&P 500 index.
But that’s just a short period in time, and a limited array of data. “The problem is that gurus sometimes get it right – until they get it wrong,” says Anthony D’Asaro, an alternatives fund analyst with Morningstar in Chicago.But that’s just a short period in time, and a limited array of data. “The problem is that gurus sometimes get it right – until they get it wrong,” says Anthony D’Asaro, an alternatives fund analyst with Morningstar in Chicago.
No manager’s winning streak remains intact forever. The Guru Index ETF’s creators note that the impact of any single big mistake will be muted because it would only be one of 50 holdings. Still, would you really have wanted to follow Bill Ackman into JC Penney and take a 50% hit as a result?No manager’s winning streak remains intact forever. The Guru Index ETF’s creators note that the impact of any single big mistake will be muted because it would only be one of 50 holdings. Still, would you really have wanted to follow Bill Ackman into JC Penney and take a 50% hit as a result?
Moreover, making investment decisions based on 13F filings is tricky. Let’s say a “guru” (the ETF’s managers don’t disclose their individual identities) takes a position in a stock today. He won’t need to disclose that holding until mid-April, 45 days after the end of the first quarter. By then, a lot could have changed. Although the ETF index is designed to winnow out rapid-fire traders who may only hold big positions for a few days or even hours, you’ve got no way to know whether a stock the guru loved when he bought it at, say, $10, is still a buy today, at $18 a share.Moreover, making investment decisions based on 13F filings is tricky. Let’s say a “guru” (the ETF’s managers don’t disclose their individual identities) takes a position in a stock today. He won’t need to disclose that holding until mid-April, 45 days after the end of the first quarter. By then, a lot could have changed. Although the ETF index is designed to winnow out rapid-fire traders who may only hold big positions for a few days or even hours, you’ve got no way to know whether a stock the guru loved when he bought it at, say, $10, is still a buy today, at $18 a share.
The 13F data also may only show part of the whole picture, leaving out the "hedging" part of hedge funds. When managers go "long," or buy, one stock in the belief that it will rise, they also go "short" on other stocks in the belief that they will fall in value. The longs are disclosed in the 13F; the shorts are not. The 13F data also may only show part of the whole picture, leaving out the "hedging" part of hedge funds. When managers go "long", or buy, one stock in the belief that it will rise, they also go "short" on other stocks in the belief that they will fall in value. The longs are disclosed in the 13F; the shorts are not.
In fact, many hedge fund investors will offset one position with another, as Providence-based financial advisor Robert Cusack of WhaleRock Point Partners discovered when he dug more deeply into one hedge fund manager’s purchase of Puerto Rico municipal bonds.In fact, many hedge fund investors will offset one position with another, as Providence-based financial advisor Robert Cusack of WhaleRock Point Partners discovered when he dug more deeply into one hedge fund manager’s purchase of Puerto Rico municipal bonds.
“He was buying the bonds, but also shorting the shares of Assured Guaranty,” an insurance company that would be on the hook if Puerto Rico defaulted on those bonds. That hedge, Cusack says, signals that the manager isn’t as enthusiastic on the muni bonds as his “long” position suggested when viewed in isolation.“He was buying the bonds, but also shorting the shares of Assured Guaranty,” an insurance company that would be on the hook if Puerto Rico defaulted on those bonds. That hedge, Cusack says, signals that the manager isn’t as enthusiastic on the muni bonds as his “long” position suggested when viewed in isolation.
“There are definitely concerns,” acknowledges Jay Jacobs, a research analyst for Global X Funds, the ETF’s creator. Still, he believes that the approach “is founded in solid research” and has faith in the returns. “This is a diversified fund” and that diversification will help limit downside risk, Jacobs adds.“There are definitely concerns,” acknowledges Jay Jacobs, a research analyst for Global X Funds, the ETF’s creator. Still, he believes that the approach “is founded in solid research” and has faith in the returns. “This is a diversified fund” and that diversification will help limit downside risk, Jacobs adds.
If you want to swim with the hedge fund sharks, there are better ways to do it. Some longer-established “hedge fund lite” vehicles might have less impressive returns than the Gurus did in their short history, but Evensky favors those that are backed by a “clear, credible intellectual process” rather than a “gimmick”. One he admires is Natixis ASG Global Alternatives, a fund that Massachusetts Institute of Technology professor Andrew Lo created based on a complex formula to hedge stock and bond portfolios and diversify. If you want to swim with the hedge fund sharks, there are better ways to do it. Some longer-established “hedge fund lite” vehicles might have less impressive returns than the gurus did in their short history, but Evensky favors those that are backed by a “clear, credible intellectual process” rather than a “gimmick”. One he admires is Natixis ASG Global Alternatives, a fund that Massachusetts Institute of Technology professor Andrew Lo created based on a complex formula to hedge stock and bond portfolios and diversify.
It may be complex; it's not glamorous or flashy. But that’s true of “best of breed” hedge fund managers, those who spend more time refining their investment process than they do chatting on Twitter or posturing on CNBC.It may be complex; it's not glamorous or flashy. But that’s true of “best of breed” hedge fund managers, those who spend more time refining their investment process than they do chatting on Twitter or posturing on CNBC.
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