Scoff if you want at those who copy professional investors such as Warren Buffett and David Einhorn – but funds modelled on copycat investing have been doing remarkably well.
The AlphaClone Alternative Alpha exchange-traded fund launched at the end of May 2012 and has since delivered a total return of 46.5 per cent, after factoring in dividends. That is nearly 5 percentage points better than the S&P 500.
The Global X Guru index ETF has done even better. It has delivered a return of 68.5 per cent since its launch in June 2012 – more than 27 percentage points better than the S&P 500.
It's not hard to see the attraction here. There is a strong fascination with what the world's most brilliant investing minds are up to, and regulatory filings known as 13Fs (a requirement for institutional investment managers) give us a tantalizing glimpse of their activities each quarter.
When you follow one pro, though, you run the risk of picking the wrong stock picker at the wrong time (or the right stock picker and the wrong stock); but follow a group of pros through an ETF, and you virtually eliminate the risk of latching onto a dud but you still gain the collective stock picks of some very smart investors.
In the case of the Guru fund, it draws from the holdings of hedge funds with concentrated portfolios and relatively low turnover rates, then weights the stocks equally. Right now, it has 54 holdings, including Education Management Corp. (Providence Equity Partners is a big investor), Pandora Media Inc. (Stephen Mandel's Lone Pine Capital), US Airways Group Inc. (David Tepper's Appaloosa Management) and Vodafone Group PLC (Paulson & Co).
The AlphaClone fund is more complex: It ranks hedge fund managers using a proprietary scoring method and then weights stocks based on the number of hedge funds owning them. Top holdings among the 83 stocks include Twenty-First Century Fox Inc., Valeant Pharmaceuticals International Inc., American International Group Inc. and Citigroup Inc.
Are there problems with this sort of investing strategy? You bet. Regulatory filings tend to be stale by the time the public gets hold of them, which means that one of these ETFs could be buying stocks that a hedge fund manager is now selling. Also, the pros are not infallible: John Paulson and Bill Ackman are struggling to repair their reputations following a few disastrous investments. And there is some evidence that the top holdings among even the top-performing hedge funds are underperformers.
But if you can't look away from what the pros are doing and recognize that, collectively, they probably know a thing or two about investing that you don't, these ETFs are intriguing. And while their track records are short, they are off to a good start.
David Berman