As the U.S. positions for a growing economy with some risks along the way, investors may consider a disciplined exchange traded fund strategy that incorporates high-conviction picks among investment experts.
“We expect the prevailing trends of slow but steady global economic growth and a supportive equity environment to carry over into 2017. If these trends remain intact, we recognize subtle yet important transitions in the macro landscape,” Candice Tse, Vice President of Strategic Advisory Solutions at Goldman Sachs Asset Management, said in the recent webcast, An ETF to Follow Hedge Fund Managers’ ‘Very-Important-Positions’.
Specifically, the Goldman Sachs team believes we may continue to see economic expansion in the U.S. where fiscal policy will support growth, improvements in consumer and labor markets in Europe and overall improving macroeconomic fundamentals in the emerging economies.
“We expect the seven-year global expansion to persist, driven by a sustained consumer recovery, manufacturing, evolving monetary policy, and fiscal stimulus,” Tse said.
Investors, though, should remain cautious as there are still lingering risks, like global politics and elections, pace of U.S. rate tightening, sustainability of Chinese recovery and corporate earnings.
In a changing environment with an improving growth out look but persistent risks, investors will have to identify the best ideas to gain market exposure. For instance, some may turn to cues from the hedge fund industry experts.
However, most may not have the connections nor the necessary minimum investments necessary to access these hedge fund investments.
Nadia Papagiannis, Director of Alternative Investment Strategy for Global Third Party Distribution at Goldman Sachs Asset Management, looked at the performances of HFRI indices – broadly constructed indices designed to capture the breadth of hedge fund performance trends, and found that the investable index with a smaller number of funds underperformed the non-investable hedge fund index, which includes a much broader universe, “suggesting the better performing funds may not be currently open to investment and/or there is some performance bias in this HFRI index.”
Moreover, the disparity in performances among various hedge funds makes it hard for individual investors to pick the winners from the losers.
“A large universe of funds in the alternatives investment universe characterized by high historical performance dispersion and low performance persistence makes manager selection challenging,” Papagiannis added.
Alternatively, Zahid Nakhooda, Vice President of ETF Product Specialist at Goldman Sachs Assest Management, pointed to the recently launched Goldman Sachs Hedge Industry VIP ETF (NYSEArca: GVIP) as an easy-to-use alternative to access some of the “Very-Important-Positions” among expert hedge funders. The ETF is comprised of U.S.-listed stocks that most often appear in the top 10 holdings of over 650 fundamentally-driven hedge fund managers, managing $700 billion in equity, which may help investors to more confidently navigate the changing conditions ahead.
“The combination of a solid macro landscape and a fluid policy outlook reminds us that disciplined investing – meaning portfolio design that anticipates change – is essential during periods of transition,” Tse said.
To identify this group of most important positions among hedge fund managers, Goldman Sachs starts with a view of their holdings through regulatory filings that many hedge funds are required to complete on a quarterly basis, called “13F”s – the reports include number of shares and total market value of a manager’s long holdings in applicable securities on the last day of each calendar quarter and must be filed with the SEC within 45 days of the end of a calendar quarter.
GVIP provides investors with an investment that expresses both long and short views to access dynamic market themes and to hedge out beta exposure while equitizing cash to minimize drag.
Financial advisors who want to learn more about a hedge fund replication strategy can watch the webcast here on demand.