AlphaClone Debuts Hedge-Fundlike ETF

May 31, 2012

AlphaClone enters the ETF market with a first-of-its-kind long/short strategy.

AlphaClone, a San Francisco-based firm that says it enables investors to “clone” what top investment managers are doing, together with Exchange Traded Concepts, today rolled out a fund that invests directly in the equity positions of hedge funds, serving up what it calls alternative alpha. This is the firm’s first ETF.

The AlphaClone Alternative Alpha ETF (NYSEArca: ALFA) is a first of a kind because unlike other hedge fund replication strategies such as IndexIQ’s Hedge Multi-Strategy Tracker ETF (NYSEArca: QAI) and the ProShares Hedge Replication ETF (NYSEArca: HDG), ALFA is true portfolio replication, while QAI and HDG are beta factor replications.

What that means is that ALFA owns the same portfolio that top-rated managers own, capturing the alpha potential and the long positions chosen by these managers, while QAI and HDG replicate the statistical quality of returns of an index of hedge fund managers. ALFA comes with an annual expense ratio of 0.95 percent.

ALFA should fill a need many investors have for a liquid alternative within their hedge fund allocations as a way to protect themselves in times of weak market action. Often, liquidity means giving up alpha, but this new fund should serve up both, AlphaClone’s Chief Executive Officer Mazin Jadallah told IndexUniverse.

“ALFA is the first ETF to invest directly in the equity position of hedge funds, and is a good alternative to fund-of-funds,” Jadallah said. “This product gives liquidity without giving up alpha potential.”

The portfolio, which focuses on mitigating downside volatility and reducing overall market correlations, can be anywhere from 100 percent long—selecting long positions from hedge funds’ public disclosures—to as much as 50 percent short, depending on market volatility targets the methodology stipulates.

For instance, if the S&P 500 Index closes below its 200-day moving average at the end of any month, ALFA turns to a market-hedged position—it goes short—to seek positive returns while offsetting the long exposure to that index.

The portfolio is equal weighted, but also has an “overlap bias,” meaning if more than one of the hedge fund managers included in the mix own a certain stock, that stock will be represented more than once in the mix. The portfolio rebalances quarterly.

Year-to-date, the index benchmarking ALFA—the rules-based AlphaClone Hedge Fund Long/Short Index—is up 2 percent. By contrast, year-to-date, IndexIQ’s QAI is only marginally up, while ProShares’ HDG is down 2 percent. Those latter performance numbers look even redder in a 12-month chart.

ALFA is the second ETF to turn to Exchange Traded Concepts (ETC) for its low-cost, private-label ETF platform, the same structure behind the Yorkville High Income MLP ETF (NYSEArca: YMLP).

ETC serves as investment advisor to the fund.