Hedge Fund ETFs Still Fighting Head Winds

Chipotle Mexican Grill was in the news last week after hedge fund Pershing Square disclosed a 9.9% stake in the fast casual restaurant's stock. News of Pershing's involvement sent shares of Chipotle soaring nearly 6% on hopes that the activist fund could help turn things around at the chain, which has been struggling following an E. coli and norovirus outbreak late last year.

Headed by outspoken billionaire Bill Ackman, Pershing has made a number of big investments over the years―some successful, some not so successful. In recent months, the hedge fund has made headlines for its ill-fated bet on Valeant Pharmaceuticals and against nutritional supplement company Herbalife.

Losses in those positions and others fueled the hedge fund to a decline of 20.5% in 2015, its worst return ever. So far this year, the fund is again down by double-digit percentages.

Putting aside some of the hedge fund's recent missteps, Pershing Square has managed to outperform the market over the past decade. According to a January letter to Pershing investors, the hedge fund has outperformed the S&P 500 by an average of 10% annually since its inception in 2004.

There's no guarantee that outperformance will continue going forward. But in light of Pershing's latest investment, it's worth checking in on a few of the hedge-fund-tracking products in the ETF world. These ETFs are likely to take into consideration Pershing's recent move into Chipotle, as well as the moves of countless other hedge funds.

GURU's Fall From Grace

The Global X Guru Index ETF (GURU), with $69 million in assets, is one of those exchange-traded funds that mimics hedge fund positions by looking at quarterly 13F filings. GURU filters for hedge funds with concentrated equity positions and long holding periods.

Currently, top holdings include GrubHub, Pandora, Investors Bancorp, Autodesk, Baidu and Facebook. 

GURU's Top 10 Holdings (as of 9/13/16)

GURU's portfolio hasn't done well recently―the fund is down 0.6% year-to-date after losing 10.8% in 2015. But it's had its moments, such as in 2013, when it outperformed the S&P by 15%.

That's also around the time that assets in the ETF peaked at about $650 million. Since then, GURU has fallen out of grace with investors and has about 10% of the assets it once did.

GURU's expense ratio of 0.75% makes it much cheaper than that which hedge funds typically charge, but investors are likely to shy away from the fund until it can prove it can beat the market again.

Rival ALFA Underperforms

The $48 million AlphaClone Alternative Alpha ETF (ALFA) is GURU’s main rival. ALFA takes a similar approach to its competitor by scouring 13F filings and replicating positions of top hedge funds and institutional investors.

Current top holdings for ALFA include Amazon, Johnson & Johnson, Simon Property Group, Alphabet, Microsoft and Activision Blizzard.

ALFA's Top 10 Holdings (as of 9/13/16)

The fund has a steeper expense ratio than its rival—0.95%—and has underperformed in most time periods. Year-to-date it is down 6.3% after shedding 11.5% last year.

Since inception in May 2012, ALFA is up 48% compared with 63.5% for GURU and 82.3% for the SPDR S&P 500 ETF (SPY).

Contact Sumit Roy at [email protected].