Custom Clones: Winning in a Losing Sector

A couple of weeks ago we looked at how consensus picks amongst AlphaClone’s entire hedge fund universe performed over time on a sector by sector basis.  We compared the annualized performance since 2000 of the Top 10 Popularity clone for each of the 12 sector-specific fund groups pre-created for our members (we all them Sector Picks).  If you recall the results were impressive - the clones beat their corresponding benchmark index in 11 of the 12 sectors we looked at.  

Here are the results again to refresh your memory:

Avg. Annualized Returns Since 2000 (as of 2/27/09)

Sector	Clone	Benchmark	+/-
Materials	9.2	-3.2	12.4
Non Cyclical	12.7	0.4	12.3
Capital Goods	4.3	-7.3	11.6
Financial	-0.7	-11.4	10.7
Services	-5.4	-12.2	6.8
Energy	11.9	5.2	6.7
Transportation	4.6	-0.7	5.3
Utilities	3.5	-0.9	4.4
Conglomerates	-10.8	-15.0	4.2
Technology	-9.7	-13.7	4.0
Healthcare	-1.0	-2.2	1.2
Cyclical	-8.7	-7.8	-0.9

Note that one of the clones with below average outperformance was for the Technology Sector – the clone “only” beat the underlying benchmark by 4 percentage points annualized.  We thought it would be fun to see if we could construct a technology focused clone that performed far in excess of the benchmark index.  This also gives us the chance to showcase how AlphaClone can create custom clones tailored to a specific investment theme.

We screened all of the funds in our universe using the “Create A Fund Group” feature.  The screen took all of two minutes to run.  We simply sorted the fund list by clicking on the column headers that corresponded to the criteria we wanted to filter on.  Here’s the screen we ran:

1. Funds with “technology” as their top sector allocation, AND
2. With 20% or more of their total market value allocated to their top ten holdings  

Presto.  We can now look at the various cloning strategies (Popularity, Best Ideas, Top Holdings) for this group - we called the group "Technology Titans".  Every strategy we looked at beat the S&P500 Information Technology benchmark over the analysis period but one clone in particular did exceptionally well beating the benchmark by nearly nine percentage points annualy since inception (2000).  The clone is called the Best Idea and its algorithm: 

• Buys the top new {technology} position from each fund in the group each quarter
  
• Sells when that position no longer appears as a holding in the manager’s filing
  
• Limits the total number of quarterly holdings to no more than fifty.
  

Here are the return results:

Technology Titans:  Returns Since Inception (as of 3/27/09)

	Best Idea Clone	Benchmark	+/-
Annualized Return	-3.3	-12.2	8.9
Total Return	-26.2	-69.6	43.4
Volatility	33.1	30.3	2.8
Max Drawdown	-74.0	-79.5	5.5

 

If you are wondering how the clone is fairing year to date, its beating the index by almost three percentage points so far this year.  

The technology sector has been essentially decimated twice in the past decade making it one of the riskiest sectors to have invested in.  Despite this, our star clone managed to outperform the benchmark three-fold while still exhibit similar volatility characteristics!

Whether you are an individual investor looking to make better investment decisions or a research analyst looking to discover your next investment thesis – AlphaClone’s ability to customize clones and validate investment ideas is really unique.