The markets today and in the near future are challenging. Generating alpha is the mandate of all investors but the times of 8%+ annually yielded from equity investments with dividends above 3% are quickly evaporating. U.S. valuations are high and demand for alternative investment options is increasing everyday. AlphaClone sees this all as an opportunity. They’ve taken a practical and pragmatic approach to building portfolios that leverages the availability of technology and ace-investor strategies to manufacture alpha. We caught up with them as they launch their AlphaClone International ETF (ALFI) today. The transcript is below.
- Tell us a little about AlphaClone, your investment strategies and ETFs
Brad Bredemann:
I’ve known Maz for years. He founded AlphaClone as a research service in 2008 when I was still at Blackrock in the iShares ETF business. His motivation was to find an objective way to monitor and evaluate what the “smart money” was actually doing so that he could make better investment decisions for himself.
What started as a research service morphed into an investment firm in 2010 on the strength of the results he was seeing in clone simulations. He developed the Clone Score methodology and applied it to several investment strategies in separate accounts. Six years later the performance results from those strategies speak for themselves and can be downloaded from our website.
In 2012, AlphaClone launched ALFA, the world’s first ETF to track hedge fund 13F filings. The fund garnered 5 stars from Morningstar on its 3 year anniversary in May of this year, and has outperformed the S&P 500 over a great majority of its existence. On Tuesday, November 10, we are launching AlphaClone International ETF (“ALFI”). All of our strategies are built for long-term investors to take advantage of the highest conviction ideas of the best investors our research uncovers.
- Now that we know a little more about who you are, can you spend a few minutes telling us about your process in the portfolio construction of ALFI?
Maz Jadallah:
Our mission is to solve the manager selection riddle for investor. Manager selection is hard for many reasons and getting harder because the sheer number of products choices continues to explode. We do this by analyzing the 13F data set.
The value of 13Fs lies in what they contain, and what they do not. If you look at a manager’s reported performance, it combines many factors including security selection, use of leverage, trading skill, choice of implementation, etc. Yet if you look only at a manager’s reported holdings, you can strip away all of these factors except for one – what did the manager own at the end of a given period.
We have pierced two myths related to this information. First, there is a view that holding periods are very short – in reality, we have found that holding periods are on average around a year, and for high conviction holdings can be much longer than that. Second, hedge fund managers promote their ability to short securities and the value of hedging in part to justify 2-and-20. Yet when we compare most manager’s reported performance against the performance of their reported holdings, the latter is almost always superior.