ETFs a Better Way to Hedge Fund Investing

To the average investor, the mention of hedge funds implies a level of often unobtainable glamor. With the meaty fees (often 2% of the initial investment and 20% of profits) and star-like status afforded many hedge fund managers, some investors assume hedge funds deliver superior returns. That is not always the case and that much was seen in 2014.

“While 2014 saw some high-profile successes, eVestment estimates of hedge funds’ average gains range from 2.9% to 4.6% for the first 11 months of the year, a period in which the Standard & Poor’s 500 index climbed nearly 12%,” reports Teresa Rivas for Barron’s.

As Barron’s notes, investors eager to get participate in hedge fund strategies could have done better last year with exchange traded funds that look to replicate hedge fund tactics rather than actual hedge funds.

Take the example of the AlphaClone Alternative Alpha ETF (NYSEArca: ALFA), which trailed the S&P 500 by a bit last year, but still managed a gain of 12.5%. ALFA “tracks the performance of US-traded equity securities to which hedge funds and institutional investors have disclosed significant exposure,” according to AlphaClone.

ALFA’s rival, the Global X Guru Index ETF (NYSEArca: GURU), trailed the S&P 500 last year with a gain of 3.2%, which was more inline with the broader hedge fund universe. However, GURU has returned an impressive 84.6% over the two and a half years, topping the S&P 500 by 1,340 basis points over that period. [ETFs for Your Inner Hedge Fund Hero]

GURU has gained $397.7 million in assets under management since coming to market in June 2012, making the ETF an undoubted success. The ETF’s success also spurred the introduction of two cousins – the Global X Guru Small Cap Index ETF (NYSEArca: GURX) and the Global X Guru International Index ETF (NYSEArca: GURI) – though those ETFs have yet to gain a wide following. [Nifty Guru ETF]

ALFA, GURU and rival ETFs are often criticized due to “their dependence on the quarterly 13F filings that hedge funds submit to the SEC. Because most funds wait the full 45 days permitted after the end of each quarter to disclose their holdings, the information is at best a month and a half old; at worst, it’s closer to 4½ months behind the hedge funds’ trades. Nor do the filings differentiate between long and short positions,” according to Barron’s.