Hedge Fund ETFs

An ETF that debuted in late May of last year with a focus on delivering hedge fund like returns is AlphaClone Alternative Alpha ETF (NYSEArca: ALFA), expense ratio 0.95%. The fund tracks the proprietary AlphaClone Hedge Fund Long/Short Index, with the goal of scoring the ideas, holding by holding, of hedge funds that publicly disclose their equity holdings via 13F-HR forms.

In essence, the AlphaClone methodology filters through these publicly disclosed equity holding filings, (330 hedge funds are currently included in the screening) and evaluates the HFs themselves in terms of “scoring” them.

The goal here is to follow the more “established” hedge funds that have been successful in the past, more closely than the rest of the pack in attempts of replicating or partially replicating what they are doing within ALFA. Additionally, the index constituents that are ultimately selected are equal weighted but with an “overlap bias” (securities that are held by twice the number of managers in the index itself are given double the weight in the index and there is a quarterly rebalancing).

The fund provider points out that the ETF presents an access point to a hedge fund like vehicle but without the typical constraints that institutional investors generally face including lockups and liquidation costs. [Hedge Fund Replication ETF]

The fund is indisputably in its early-going, but since inception (5/31/2012), the fund has registered impressive returns and the ETF is trading near its all-time product high albeit on limited daily trading volume, causing it to appear on certain institutional “radars.”