Using ETFs to Participate in Hedge Fund Trends

Since 1990, the S&P 500 consumer staples sector has been among the best performers in the broader index, rising 6.2% on average. Couple this with the market volatility experienced in the third quarter of 2015 that helped the dividend laden, low-beta sector to significantly outperform the broader market, it should be no surprise the ten largest hedge funds favored this sector, according to S&P Capital IQ’s Hedge Fund Tracker research. 

S&P Capital IQ analyzes the latest quarterly 13F filings to determine the ten largest hedge funds, managing approximately $190 billion in assets, seeking out what stocks and sectors have been most in and out favor. For some this is an opportunity to see what the “smart money” has been buying and selling. According Pavle Sabic, Director of Market Development for S&P Capital IQ and the author of the hedge-fund tracker research, consumer staples stocks were the most popular, with $3.7 billion of net new assets. We think sizable buying in the consumer staples sector by hedge funds was a positive for the Consumer Staples Select Sector SPDR (XLP).

Meanwhile, the information technology sector saw the largest outflows for the third straight month according the S&P Capital IQ’s hedge fund research.

In prior S&P Capital IQ hedge fund tracker reports, Valeant Pharmaceuticals (VRX) was a popular position for these hedge funds, but Sabic noted it was not among the top-5 buys this quarter. 

While some investors may want to use this analysis to spot securities that are in and out favor by hedge fund managers, others may want the benefits and liquidity that ETFs provide.

Global X Guru ETF (GURU), with $185 million in assets, is one of the various ways individuals can invest in stocks held by hedge funds. The ETF is comprise of the top US listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and concentrated holdings. From a sector perspective, consumer discretionary and financials were the largest, while technology was underweighted relative to the S&P 500 index, due we think in part to recent hedge fund selling activity.

Another ETF that seeks to track activities of the hedge funds is AlphaClone Alternative Alpha (ALFA) and has approximately $150 million in assets. AlphaClone’s proprietary “Clone Score” methodology to aggregate on a quarterly basis the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures. Apple (AAPL), which is held by Icahn Capital and other hedge fund managers, is the largest position with other top-10 holdings including Allegan (AGN) and Valeant Pharmaceuticals.

After outperforming the S&P 500 index through September, ALFA has fallen sharply since then due to its exposure to hard-hit stocks such as VRX; ALFA down 14% year to date through November 17, while GURU was down 10%. GURU has the lower expense ratio, at 0.75%, of the two ETFs.

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