Being a hedge fund manager sounds glamorous and, for some, it is very, very lucrative.
However, parsing through the largest individual holdings of famous investors is not as rewarding a strategy as it may appear.
For example, following a basket of Baupost’s top-10 holding “beat the markets but about 9% a year since 2000. Want to follow Baupost’s top holding? BAD IDEA. Returns -0.9% a year, over 4% a year worse than the S&P,” according to Mebane Faber.
Faber notes that the difference is roughly the same, about 9% a year, when applying a similar strategy to the equity holdings of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A). [A Buffet Bounce For Energy ETFs]
However, resisting the allure of 13F ETFs, or those funds focused on some of the top holdings of noted hedged funds, is getting harder given the returns offered by those ETFs this year. Specifically, the AlphaClone Alternative Alpha ETF (NYSEArca: ALFA) has jumped about 26% this year while the rival Global X Guru Index ETF (NYSEArca: GURU) is higher by 34%. [Global X Gives Guru a Facelift]
ALFA “tracks the performance of US-traded equity securities to which hedge funds and institutional investors have disclosed significant exposure,” according to AlphaClone.
Top-10 holdings currently include American International Group (NYSE: AIG), Citigroup (NYSE: C) and Priceline (NasdaqGM: PCLN).
GURU has $275.3 million in assets under management, $252.1 million of which have come into the fund this year. Top-10 holdings in that ETF include US Airways (NYSE: LCC), Pandora (NYSE: P) and Yahoo (NasdaqGM: YHOO).
GURU has proven to be successful enough that Global X has filed plans to introduce two new spins on the ETF – the Global X Guru Value ETF and the Global X Guru Activist ETF.
Evidence suggests the basket approach to hedge fund holdings rather than simply buying a manager’s largest holding works.
“Across 20 of my favorite managers since 2000, investing in the top 1 idea underperforms investing in the top 10 ideas by 4% a year. Massively bad idea. 70% of the funds top holding clone underperforms the top 10,” said Faber.
GURU, ALFA Year-to-Date