The only thing worse than paying 2% a year and 20% carry to a less than stellar hedge fund manager is adding another 1% a year and 10% carry to a “fund of funds”. Investors allocate to “fund of funds” structures primarily because they recognize that they can:
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Get “expert” manager selection
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Reduce single manager risks like fraud (maybe), performance and style
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Reduce position/asset overlap/overexposure
Even if they invest in a fund of funds that gets it all right (rare), by the time you get through the layers of fees, the lockups and other limitations, all of the value has been given back and then some. Tell me you're not nodding your heads right about now.
But what if you could get all the benefits of hedge fund and “fund of funds” investing with none of the drawbacks?
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What if you had relatively unfettered access to hedge fund managers irrespective of whether they are taking on new clients?
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What if you could reduce fees from 3% per year and 30% carry (or more) to less than 1.5% annually (including trading commissions)?
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What if you could eliminate any form of lock up provisions, both with respect to your specific account and those that may apply to the fund overall (i.e the “drawbridge”)?
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Last, but certainly not least, what if you didn't have to compromise on performance potential?
AlphaClone's core strategies are all examples of how you can achieve the above – they are all “virtual fund of funds” that offer all the benefits of hedge fund investing with none of the hassles. Our core strategies are all derived by combining and backtesting the public disclosures of “groups” of hedge fund managers. Investors can access them at a maximum fee of 1.5% per year including trading costs inside separately managed accounts that have no lockup provisions. We've created strategies that draw on our proprietary research as to which managers makes the most sense to include and which ones to ignore and unlike traditional fund of funds we can construct our strategies by drawing on any existing hedge fund, as long as they are large enough so that they are required to file disclosures with the SEC (managing $100 million or more).
But what about performance? The table below compares the performance since 2000 of our two flagship strategies with the Dow Jones Credit Suisse Hedge Fund and Long/Short indexes.
Whether on an absolute or risk-adjusted (see 2008) basis it's difficult to ignore the performance potential for an approach like ours. Also, in addition to unfettered manager selection and performance potential, our core strategies are designed to mitigate additional risks on a stand alone basis or when combined:
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Downside market risk: by implementing dynamic hedging, a portfolio risk mitigation tool that oscillates between a long only and market neutral stance based on a simple technical “trigger”, we can significantly reduce maximum drawdowns and overall market risk. For a better look at how dynamic hedging helps our flagship AlphaClone Select and Momentum Select strategies, you can download data sheets for each strategy here.
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Manager risk: all core strategies are derived from multiple managers which allow you to mitigate the risks of being exposed to just one manager. This includes the manager's performance risk as well as the unfortunately all too real risk of fraud.
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Geographic risk: our International core strategy will invest in foreign company ADRs only and our ETF core strategy invests in region specific ETFs (EFA, Korea, Brazil). The four remaining strategies are primarily US domestic.
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Asset class risk: our ETF core strategy, can invest in commodities (GLD, USO), real estate (REITs) and can even be short US Treasuries (as of 8/16/2010, the strategy holds an ETF that is short US Treasuries, ticker:TBT).
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Sector risk: our ETF core strategy can invest in sector specific ETFs and can either be long or short the sector! As an example, in early 2007 our ETF core strategy was short the financials sector by holding SKF (an inverse financials ETF). Also, the strategy currently holds XLP, a consumers staples ETF (long).
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Style risk: our AlphaClone Select core strategy tends to select large cap value stocks while our Momentum Select strategy tends to like growth stocks and our Activist Masters strategy invests in the deep value ideas of activist managers.
Hedge funds can be great investments if you can get into the right one(s) at the right time. But that's kind of the whole point, of the thousands of hedge funds to choose from, only a relative handful earn their fees – and those are very difficult to find much less break into. That leaves the investor with a series of second and third tier choices – a.k.a. hedge fund hell. Rather than settle for less than investing with the best, we humbly suggest you find out whether our approach works for you by taking our suitability questionnaire.
