{"id":39026,"date":"2013-06-14T12:37:53","date_gmt":"2013-06-14T16:37:53","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39026"},"modified":"2013-06-14T12:37:53","modified_gmt":"2013-06-14T16:37:53","slug":"guru-vs-alfa-comparing-the-two-guru-etfs","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/14\/guru-vs-alfa-comparing-the-two-guru-etfs\/","title":{"rendered":"GURU vs ALFA: Comparing the Two Guru ETFs"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

June has been a rough month for a lot of investors.\u00a0 The investing themes that have done well so far in 2013\u2014everything from U.S. dividend-focused stocks to Japanese small caps\u2014have gone sharply into reverse.\u00a0\u00a0 The market has started to get jitters that the Fed\u2019s QE Infinity will actually be quite finite\u2026and it appears that Abenomics has run out of steam.<\/p>\n

We\u2019re not in bear market territory, and we\u2019re not really in a broad-based correction.\u00a0\u00a0 But investors seem to be struggling to find that next great investment theme.<\/p>\n

During times like these, it\u2019s nice to look over the shoulders of some of the best and brightest managers in the business to see how they are reacting.\u00a0 I make a habit out of digging through the trading moves of managers I admire, and sites like Guru Focus<\/a> take what used to be a tedious and time-consuming nightmare\u2014digging through SEC filings\u2014and turn it into a simple screen.<\/p>\n

Want to see what Warren Buffett<\/a> is buying?\u00a0 It\u2019s as simple as viewing his profile<\/a>.<\/p>\n

Investors looking for a one-stop \u201cbuy and forget\u201d guru following strategy now have a couple ETFs to choose from. One\u2014the Global X Top Guru Holdings Index ETF ($<\/span>GURU<\/a>)<\/b>\u2014I reviewed<\/a> about a year ago.<\/p>\n

As I noted in my review, GURU\u2019s portfolio is an equally-weighted mix of the \u201chigh conviction\u201d picks of the hedge fund managers that Global X follows.\u00a0 These would include household names like\u00a0David Einhorn<\/a>\u2019s Greenlight Capital, John Paulson\u2019s Paulson & Company, and Seth Klarman\u2019s Baupost Capital, among many, many others.<\/p>\n

AlphaClone has a competing guru product, the AlphaClone Alternative Alpha ETF ($<\/span>ALFA<\/a><\/b>).<\/p>\n

AlphaClone\u2019s methodology is a little more complex.\u00a0 The underlying index looks at most of the same managers but has a proprietary system for ranking them.\u00a0 And while the positions are \u201cequally weighted,\u201d there is an allowance for overweighting if a stock has multiple guru owners.\u00a0 For example, a stock held by twice the number of managers would have twice the weighting in the index.<\/p>\n

And AlphaClone\u2019s ETF has one other noteworthy feature: it has a \u201cdynamic hedging\u201d mechanism that allows it to be up to 50% short during a prolonged market downturn.\u00a0 In ALFA\u2019s case, the ETF will shift half of the portfolio into an inverse S&P 500 fund when the S&P 500 ends a month below its 200-day moving average.<\/p>\n

So, which ETF is better?<\/p>\n

It\u2019s really a matter of opinion.\u00a0 ALFA\u2019s built in hedging strategy would have been a life saver during the 2000-2003 bear market or the 2008 meltdown.\u00a0 But during a long range-bound market, there is the risk of getting perpetually whipsawed by buying and selling at precisely the wrong turning points.\u00a0 I prefer to hedge my portfolio in other ways\u2014such as by altering the allocation between equities and cash or bonds or by taking an active rebalancing approach.\u00a0 But is it really just a matter of preference and investing style.<\/p>\n

ALFA\u2019s ability to overweight positions based on ownership by multiple gurus is a nice feature, however, and I consider this an advantage over GURU\u2019s simple equal weighting.<\/p>\n

\"GURU_ALFA\"<\/a><\/p>\n

Taking a look at YTD performance, however, GURU has the better record.\u00a0\u00a0 ALFA has tracked the S&P 500 pretty closely this year, whereas GURU is outperforming by a good 5%.<\/p>\n

A single five-month period is not sufficient for judging the performance of a model, and over time I would expect both to outperform the S&P 500, at least before taxes and fees.<\/p>\n

But you should also have realistic expectations about what you are buying.\u00a0 Buying GURU and ALFA is not the same as buying an interest in the underlying hedge funds.\u00a0 As I noted in my original article on GURU, the ETFs only buy listed stocks, and many major guru investments are not publicly traded.\u00a0 Many of Warren Buffett\u2019s holdings are privately-held companies, for example.<\/p>\n

Furthermore, the ETF only tracks long positions.\u00a0 If a given \u201chigh conviction\u201d pick is really just one half of a pair trade, the ETF managers would have no way of knowing this.\u00a0 And there is no way to account for futures, options or other derivatives that might be part of the trade.<\/p>\n

And finally, as with all guru-following strategies, there is a time lag.\u00a0 It is entirely possible that the conditions that lead a guru to buy a stock no longer exist by the time that GURU and ALFA place their trades.<\/p>\n

My take?\u00a0 GURU and ALFA are both decent ETF products, and I expect both to do well.\u00a0 But if you really want to take full advantage of guru-following strategies, roll up your sleeves and look at your favorite investors one by one.\u00a0 You can learn more from looking at the manager\u2019s portfolio as a whole than by simply selecting the top pick and blindly following it.<\/p>\n

Sizemore Capital has no position in GURU or ALFA. This article first appeared on InvestorPlace<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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