AlphaClone

AlphaClone Featured on Absolute Return + Alpha

Absolute Return + Alpha staff writer Lawrence Delevinge published an article this morning entitled "Do Hedge Fund Copycats Work?".  The artilcle features AlphaClone and discusses our first full year of performance results as an investment advisor. Here's the full text of the article:

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Do hedge fund copycats work?

January 11, 2012   By Lawrence Delevingne

Assessing AlphaClone’s first year running virtual funds of hedge funds.

AlphaClone launched in 2008 with an ambitious idea: allow everyday investors to copy hedge fund returns without the high fees. By piggybacking on the publically disclosed stock investments of Baupost’s Seth Klarman, SAC Capital Advisor’s Steve Cohen, Tiger Global’s Chase Coleman and nearly 300 hedge funds and other money managers, the San Francisco firm sought to give everyone access to the masters.

Besides research tools, the firm offers a variety of separate account strategies, charging flat management fees of 1% to 1.5% of assets. Those accounts allow clients to invest alongside managers practicing particular equity strategies, such as one, Value Masters, that derives its holdings from 15 undisclosed value fund portfolios.

In its first full year of trading, AlphaClone’s accounts produced net returns that came close to those of the managers they tracked, even if it was a year in which hedge funds produced their worst showing since 2008.

AlphaClone Select, an account which selects its holdings from the managers for which it has historically proved the most profitable to copy, was down 6.8% in 2011, compared to a 7.4% loss for the Dow Jones Credit Suisse Core Equity Long/Short Index—the firm’s preferred benchmark. The HedgeFund Intelligence Composite Index of hedge fund returns fell 1.94% in 2011 (data is still being updated as funds report). The Value Masters portfolio fell 2.7% in 2011, compared with a 2.3% gain for the S&P 500 (with dividends). Activist Masters, which picks its stocks from 13 activist funds, gained 7.4% for the year. The HedgeFund Intelligence Event Driven Index fell 4.50% in 2011.

"In a year that was one of the most difficult on record for hedge funds, AlphaClone's performance throughout the year has demonstrated the efficacy of using hedge fund public disclosures to derive new investment strategies that can outperform traditional hedge funds without the high fees, lockups and lack of transparency,” wrote AlphaClone founder and chief executive Maz Jadallah in an email to AR.

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Our Convictions Tested: 2011 Year End Review

The year put our convictions to the test on both the long and short sides.  How did we do? Download our year end review and perofrmance report.

Alternative Alpha: Better, Cheaper, More Liquid Access to Hedge Fund Returns

View more documents from AlphaClone .

2011 Hedge Fund Performance by Sector

Below are one and three year total returns for the Top 10 Popularity clones from our Sector Picks fund groups which allow any investor to clone hedge fund holdings by sector.  Allocating equally to each clone portfolio beginning three years ago and holding through yesterdays close would have returned 71% vs. 46% for a portfolio that allocated equally to each corresponding S&P500 sector. So much for the "crowded trade" myth.

 

 

Top 2011 Hedge Fund Performance

It's been a tough year for hedge funds. Looking at data from Hedge Fund Research, the HFRX Global Hedge Fund Index is down 9% YTD through 12/27 while equity hedge funds have performed even worse with the HFRX Equity Hedge Index down a whopping 19% for the year. 

Still, as expected, despite the lackluster average hedge fund performance reflected in the indexes above there are managers out there that have performed very well this year. While we'll have to wait for these managers to report actual net of fees results, we can get a good sense of how their largest equity holdings have performed by looking at their Top 10 Holdings clones. 

It is ironic that the manager with the best performance has now shuttered his fund to outside investors. Carl Icahn's Top 10 Holdings clone returned over 30% this year. The strategy came into the year holding Take Two Interactive [TTWO] and Biogen Idec [BIIB], both of which returned approximately 35% over their holding periods. That's still only about a third as much as the Icahn's biggest winner for the year, Motorola Mobility Holdings [MMI]. An investor in this clone would have established a position in MMI in mid-February, prior to Google's announced acquisition of the company, and would continue to hold it as of yesterday's close realizing an overall return of over 92%. 

“So what?”, you might ask, "these “top performers” lists are always backward looking and thus not meaningful at all to investors."  You'll get no argument from us there. However, the ever changing fund names on these lists from one year to the next does drive home the critical importance of diversification when cloning hedge funds. You might not have been able to capture the performance of Icahn Capital's clone, but an investor allocated to AlphaClone's Activist Masters strategy saw returns of 8% during a year when the market was flat and very volatile (read: it could have been a lot worse).

Key 2011 Takeaway: When cloning hedge funds, just like in investing generally, it is difficult to over emphasize the importance of diversification. It is diversification that allows you to simultaneously mitigate manager risk, filing/regulatory risk, investment style risk, geographic risk and non-systemic (company) risk. AlphaClone's core strategies all reflect this belief including our Hedge Fund Long/Short Index which will be introduced in ETF form toward the end of next quarter.

Happy New Year.