Global X announced yesterday that it was going to launch an ETF that mimics the moves made by hedge funds on the market. The Global X Top Guru Holdings index (NYSE:GURU) supposedl follows hedge funds based on their 13F filings with the SEC for each quarter.
A similar fund was opened by AlphaClone last week. The fund name is the AlphaClone Alternative Alpha Index (NYSE:ALFA). Although, we have not examined this fund in particular.
This article focuses on the GURU ETF.
The funds seem like an interesting investment, and the idea may well catch on, but there are many reasons to be wary. Many investors will know the facts stated below, but it is necessary to reiterate them.
By definition, in a hedge fund’s 13F filings they disclose what equities they were holding at the end of the previous quarter. These disclosures have to be made within 45 days of the close of the quarter.
First of all, the 13F filings which the ETFs are ‘tracking’ will not clone hedge fund performance. The filings have to be made, legally, within 45 days of the end of a quarter. Most funds wait out that entire period and file their reports on the last possible day.
That leaves the new ETF at least 45 days behind the market. Much can change in a 45 day period, and the ETF will be vulnerable to those changes. This leaves the ETF far behind both the long thought out and split second decisions made by hedge funds. It is the brain power behind these funds that lead to their success.
The fund will only track hedge funds that disclose more than $500 million in its ETF filings. It will also weed out hedge funds that tend to have a high equity turnover, though it is not clear what the fund considers high.
Hedge funds tend to hold more than just equities in their portfolios. They hold bonds and commodities and many other types of investment. Most movements unaccounted for by the index, leading to even greater inaccuracies along with the market lag.
Seth Klarman’s Baupost Group is an excellent example. It has $24 billion under management but only about $3 billion in equities. The other $21 billion, remarkably few people know what it consists of. We have sources at Baupost who told us its 22% cash, and the rest in a lot of private assets like real estate, along with many European stocks. Readers would not know that information if they were not viewing this article. Additionally, the GURU etf will not track 88% of Klarman’s fund holdings.
Institutional investors are required to file with the SEC when they purchase 5% of a publicly traded company. This is the 13D, or sometimes 13G filing and must be made within ten days of acquiring the stake.
The hedge fund tracking ETFs, which mimic on 13F filings, will not take these positions into account. They are in the public eye, but the hedge fund ETF does not see them. This is another significant inaccuracy and disadvantage.
ETFs can be dangerous. We’ve seen that before. The instruments are little understood and untested in many market environments. The general ETF problems apply to hedge fund ETFs, but they are not the crucial issue here.
The issue is that these funds that purport to follow the moves made by the biggest and most successful hedge funds do nothing of the sort.
Retail investors looking to mimic hedge funds may be attracted to these ETFs. Like everything else in finance, there are no promises. The design is poor, and with the Guru X following 68 funds, the cumulative disconnect between the ETF and the index it is supposed to follow is a chasm.