Hedge Fund Tracking ETFs Lagging S&P

July 08, 2014

Alpha-seeking ETFs are fine in a surging market, but they’re not so hot now.

Some of Wall Street’s most highly paid investors—read hedge funds—are taking it on the chin this year by making wrong-way bets on global markets, even as stocks climb into record territory, which has also dealt a blow to alpha-seeking ETFs that track these stock pickers.

Global macro hedge fund managers, including the likes of Paul Tudor Jones and Louis Bacon, have reportedly lost money by making the wrong reads on broad economic trends, including bets against the pullback of Japanese stocks. The Nikkei 225 Index is down close to 6 percent this year after surging 57 percent last year.

Also, the sell-off in momentum stocks in the first-quarter dampened returns for hedge funds. Investors in general looked to dump high-growth tech and health care names for more established securities. Worries about slowing growth in the U.S. and China as well as geopolitical tensions between Russia and Ukraine help fuel trimming of risk.

In the world of ETFs, that has meant funds that mimic hedge fund holdings, including the Global X Guru ETF (GURU | B-55), have lagged broad market benchmarks. GURU, which returned upward of 47 percent last year when the S&P 500 Index surged 32 percent, is up about 4 percent versus the S&P’s year-to-date gain of about 7 percent.

“GURU and the AlphaClone Alternative Alpha ETF (ALFA | D-38) track the 13F filings of these hedge funds and these hedge funds themselves aren’t doing such a great job picking stocks in this choppy market,” said Paul Britt, senior ETF specialist at ETF.com.

“They’re both looking backward trying to glean information from the collective wisdom of the best minds in the industry, and right now that approach is not working well, while it did work well in 2013,” added Britt. “Maybe there was a lot of momentum going on last year where these funds were able to ride that, and in a choppier market, their backward-looking models are not working out so well.”

The three hedge fund replication strategies and their year-to-date returns are:

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