Forget Hedge Funds, Try ETFs (ALFA, GURU)

For many investors the words “hedge fund” is viewed as a world that only the ultra wealthy are privy to. When in reality the average investor now has a backdoor into this secret Wall Street society.

There are two ETFs in particular that offer investors exposure to the strategies and stocks the hedge funds are buying. Both ETFs use proprietary methodologies to track the movements of hedge funds in an attempt to beat the overall returns of the market.

AlphaClone Alternative Alpha ETF ALFA

The ETF began trading in 2012 and was the first to invest in disclosed equity positions held by established hedge fund managers. The ETF differs in that it offers investors transparency into the positions they hold based on their exclusive strategy. An added feature of ALFA is that if its rules-driven system gives specific signals the ETF will hedge its long-only positions by shorting the market. Ideally this will help lighten any losses during a market downturn.

Since its inception on 5/30/12 the ETF is up 43 percent versus a gain of 31 percent for the S&P 500. It may be tough to judge the ETF in a short period of time that has not had a major sell-off, however there has been enough volatility to show the benefits of owning. The ETF currently has 83 stocks in its portfolio with the largest holdings being Twenty First Century Fox FOX, Valeant Pharmaceuticals VRX, and American International Group AIG. The expense ratio is above average at 0.95 percent.

Global X Top Guru Holdings Index ETF GURU

The ETF is comprised of the top U.S. listed equities based on the Form 13F that hedge funds report. Several filters are implemented to determine which hedge funds are included and the stocks from the selected funds. One key filter is that hedge funds with high turnover are not included in the process.

The ETF began trading on 6/14/12 and is composed of 53 individual stocks. The current top holdings include Education Management EDMC, Cumulus Media CMLS and US Airways Group LCC. Since it began trading the ETF is up 53 percent versus a gain of 34 percent for the S&P 500. The expense ratio is 0.75 percent.

While both ETFs may sound similar in nature because they base their unique strategies on hedge funds, in reality they are very different. There is a case that both ETFs could be held in the same portfolio. It is difficult to deny the past performance numbers in this type of market environment.