Providing retail investors an easy way to track institutional investors’ top picks, Goldman Sachs is crafting an exchange traded fund version of its widely observed Hedge Fund Trend Monitor research report.
According to a recent Securities and Exchange Commission exemptive relief filing, the Goldman Sachs Hedge Fund VIP ETF will try to reflect the performance of the Goldman Sachs Hedge Fund VIP Index, which is comprised of stocks that appear most frequently among the top ten equity holdings of U.S. hedge funds that select investments based on fundamental analysis.
Hedge funds with over $100 million invested in U.S. equities are required to disclose their holdings 45 days after the end of each calendar quarter.
The Goldman Sachs Hedge Fund VIP Index would access the disclosed holdings in hedge funds’ quarterly 13F filings with the SEC. Components are ranked within each individual hedge fund portfolio by descending market value. Approximately 50 stocks that appear most frequently in the top 10 holdings of the U.S. hedge fund universe are then included in the Goldman index. The index is also rebalanced quarterly.
Comparing the Q4 2015 13F filings to the previous quarter, hedge funds have been increasing their exposure to energy, industrials and utilities while cutting the most exposure to financials, according to a recent S&P Global market Intelligence research note. The 10 largest funds bought $1.5 billion in energy sector stocks during the quarter but dumped $2.2 billion in financial sector stocks.
The largest funds were also hit hard by the market volatility in Q4, with the top funds down $44 billion from Q3. The funds also cut down their equity exposure to the lowest for the year. Top picks among hedge funds include American International Group (NYSE: AIG), Priceline Group (NasdaqGS: PCLN), Valeant Pharmaceuticals (NYSE: VRX), Teva Pharmaceuticals (NYSE: TEVA) and Apple (NasdaqGS: AAPL). The top sells include Allergan (NYSE: ACT), Next Plc (LON: NXT), Walgreens Boots Alliance (NYSE: WBA), Lloyds Banking Group (NYSE: LYG) and Hallibruton Company (NYSE: HAL).
Goldman’s newly filed fund will join a handful of other hedge fund-replication ETFs already in the space. The Global X Guru Index ETF (NYSEArca: GURU) includes high conviction picks taken from a select pool of hedge fund 13F information. The Global X Guru Activist Index ETF (NasdaqGS: ACTX) takes the guru ETF concept a step further by focusing on companies where an activist investor, such as Bill Ackman or Carl Icahn, is angling for change. Additionally, the AlphaClone Alternative Alpha ETF (NYSEArca: ALFA) is another option to track hedge fund picks, utilizes a “Clone Score” methodology to pick alpha, or outperformance, potential from institutional-sized investors.
Furthermore, the SEC filing also included the Goldman Sachs High Sharpe Ratio ETF, which will try to reflect the performance of the Goldman Sachs High Sharpe Ratio Index. The ETF will follow U.S. large-caps with the highest projected Sharpe ratio, which is calculated by dividing the consensus prospective price return by the volatility during the upcoming six months as implied by the options market. Components are weighted by descending prospective Sharpe ratio.
The Sharpe ratio is a measure for calculating risk-adjusted returns. A high Sharpe ratio would indicate more attractive risk-adjusted returns while a zero reading would reflect a low-risk investment, such as U.S. Treasuries.
Both of the newly filed Goldman Sachs ETFs will trade on the NYSE Arca exchange but no tickers or expense ratios were provided.
Financial advisors who are interested in learning more about Goldman Sachs ETF strategies can register for the March 2 webcast, Goldman Sachs Asset Management: Market View with ActiveBeta ETFs.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.