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.