So if you believe, as we do, that there is value in the 13F data set, you can use it to evaluate every manager that reports. That’s what we have done since 2008 with CloneScore, which guides our continuous manager selection. There are over 6,000 hedge funds; we have durable data and track over 550 of these managers; for the ALPHACLN and ALFIIX indices (which ALFA and ALFI, respectively, seek to track), we choose at least 20 highest-scoring managers from which we aggregate their high conviction ideas.
In the case of ALFIIX index, we aggregate at least 40 high conviction American Depository Receipt (ADR) holdings from managers with the highest score. The index also employs the firm’s innovative dynamic hedge mechanism that allows it to vary from long-only to market-hedged when the S&P 500 closes below its 200-day simple moving average at any month’s end.
Our portfolios are constructed with four risks in mind:
- Manager Risk – we don’t fall in love with any single manager, and systematically rate them and choose those we deem to be the best
- Company / Stock Risk – we believe in concentrating portfolio risk to high conviction ideas, but limit any single name to 15% and the top five names to 50% at rebalance
- Market Risk – we believe in being long the market most of the time, and hedged during periods of protracted market downturns. As a result, we employ a Dynamic Hedge which triggers when the S&P 500 closes below it’s 200-day simple moving average on any month-end.
- Behavioral Risk – of all the risks that can trip of investors, behavioral risk is probably the most dangerous. All of our indices are rules-based, which remove emotion from decision-making and allow the long-term nature of their benefit to have maximum effect.
- What inspired you to launch the new ETF? What international markets does the ETF have most exposure to?
We think international markets are going to be an important area for investors in the intermediate and long term. Equity valuations are more favorable than in U.S. markets by quite a bit. In addition, pursuing the potential for alpha is even more important today for long-term investors given the anemic growth forecasted for equities and bonds over the next several years. This fund gives investors the potential to capture alpha in international markets in a passive, accessible and tax-friendly investment vehicle.
Currently, the index tracked by ALFI has China and Europe as the two most overweight regions. In terms of sectors, technology/Internet and healthcare are most overweight.
- How and where does this strategy fit within a broad-based portfolio asset allocation?
We’re fulfilling the promise of what liquid alternatives were meant to do – deliver performance and protect against investment risks. Maz likes to say we offer liquid alts that don’t suck. Our strategies allow advisors to spend their risk budgets more efficiently because they do two jobs: , drive growth when long, and when hedged break correlations and downside volatility. In a world of stretched equity valuations and lower forecasted returns (eg. GMO, etc.) our systematic approach to generating alpha can be valuable to every portfolio.