Tuesday, 21 February 2017
Last updated 19 min ago
Aug 22 2013 | 1:24pm ET
They say imitation is the sincerest form of flattery but in the case of the Global X Guru ETF, imitation is also profitable.
The $117 million fund, which marked its first anniversary in June, scans the 13F filings of top hedge fund managers then copies their best ideas. Since inception, according to the fund website, Guru is up about 55%.
“There's a lot of literature from academia as well as from industry practitioners that talks about the value of information in 13F filings,” Bruno del Ama, co-founder and CEO of Global X Funds, told FINalternatives during a recent phone conversation.
“The reason we started to research 13F filings in the context of ETFs is that 13Fs are filed once a quarter, four times a year, and everybody files them at the same time and so it works very, very well with something like a systematic, rules-based methodology that you can re-balance on a quarterly basis.”
Guru represents something of a departure for the ETF specialist, which was founded in 2008 and now manages $2 billion across 35 exchanged-traded funds.
“[A] lot of things that we have are providing access to themes like the Colombia equity market or the Chinese consumer market or silver miners,” said del Ama, “Guru is in some ways the only fund that, in essence, is designed to provide a return that over the medium to long term exceeds the returns of U.S. benchmark indices like...the S&P 500...[I]t's...designed to generate alpha.”
Guru begins with the entire universe of hedge funds and whittles it down by means of a number of filters. The first, said del Ama, is size: each manager must have at least $500 million in U.S. equity investments.
“Of course, a lot of these hedge funds are much larger than that because they have the long positions, the short positions and other instruments other than equities, as well as equity investments in other countries,” he said. The $500 million represents just the U.S. equities positions reported in the 13F and assures Global X the manager has had “a strong level of success in terms of raising assets.”
The second filter, turnover, is one of the most important, said del Ama. Global X eliminates funds with more than 50% turnover and ends up focusing on buy-and-hold hedge funds.
“If you try to replicate the information on a 13F from, say, Renaissance Technologies, that turns its portfolio on a constant basis, the value of that information is zero. But if you look at say, hedge funds like Tiger, they actually hold their positions for a fairly long period of time and so the information value on the positions from the 13Fs is much, much higher.”
Guru further winnows the field by considering concentration:
“Each hedge fund has to have at least about 5% of their U.S. equity portfolio in a particular position,” said del Ama. “We really want to get at their conviction investments...so we look at, basically, the largest idea and the largest position...And you end up with a universe of about 60 hedge funds or so and then for each one of those 60 hedge funds we pick their top idea and their top position.”
Guru actually holds fewer than 60 positions because some funds have the same conviction ideas. The stocks are also screened for liquidity, and are then equal weighted.
The list of hedge funds tracked by Guru includes many familiar names—Appaloosa, Fortress Investment, GLG Partners and Elliott Management, among others—and the same could be said of the ETF's top 10 holdings, as of July 1, which included T-Mobile, Pandora Media, Diamondback Energy, Pioneer Natural Resources and Lockheed Martin.
The fund employs no leverage and del Ama said its capacity is “very, very large.”
“We'll probably have to raise $1 billion before we start being concerned about any type of limit in terms of the assets that we can manage.”
Guru's investor base is varied, thanks to the democratizing effect of ETFs, with a range of investors that even extends to hedge fund managers “intrigued” by the strategy or looking for a way to “equitize the long-only part of their cash.”
And while Guru imitates hedge funds, del Ama said it should not be seen as an alternative to a hedge fund investment:
“[I]t's really not competing with hedge funds because...it's not hedged, it's just a long-only exposure, so the right way to think about this type of exposure is to compare it with a core, long U.S. equity exposure. If you have an actively managed mutual fund or you're just investing passively in the S&P 500, this is an alternative to that type of exposure.”