Download - 5 Myths About Cloning Hedge Funds
5 MYTHS ABOUT CLONING HEDGE FUNDSFuture of Finance Webinar SeriesPresenter: Maz Jadallah, Founder/CEO, AlphaCloneModerator: Zack Miller, Author, Tradestreaming.comDate: May 9th @ 4pm EST, 1pm PST
important disclosuresInvesting in fnancial markets involves risk, including the risk of principal loss. Information in this presentation is in no way intended as investment advice and should not be interpreted as such.
Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance results are provided for purposes of illustrating historical performance had a core strategy had been available during the relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makes no representation that any core strategy will achieve performance similar to any backtested performance results. Actual results could difer materially from backtested performance and future results could difer materially from backtested performance. Past performance is no indication or guarantee of future results.
The information provided herein comes from what AlphaClone believes to be reliable sources. AlphaClone, however, makes no representations as to its reliability or accuracy, and you should undertake independent analysis to ensure the accuracy of the information.
© 2010, AlphaClone LLC, All Rights Reserved. The AlphaClone logo is a service mark of AlphaClone LLC.
intro
Zack Miller, Author, Tradestreaming.com Maz Jadallah, Founder/CEO, AlphaClone
clone?
Quant investment strategy that derives
buy/sell decisions from public disclosure filings
clone?
ↂ rules basedↂ disclosure basedↂ automatedↂ repeatable
45 day delay in filing renders disclosures useless
Myth #1
1/3On average, 1 in 3 clone portfolios outperformed the S&P500 by 10 percentage points or more (2000 to 2010)
Source: AlphaClone
Average
clone vs. fund
2010 Fund (net)
Clone (gross: long)
Greenlight Capital 12.5% 21.3%Pershing Square 29.7% 25.9%Paulson & Co. 24% 19.4%Third Point 34% 25.8%Passport 18.3% 25.9%Perry Capital 14.6% 28.4%
Source: AlphaClone, “Clone vs Fund 2010”
Many hedge fund trades are “crowded”
Myth #2
Implication
Little guy gets hurt when funds exit
0 5 10 15 20 250%
5%
10%
15%
20%
25%
30%
35%
AAPL
C
GOOG
JPM BAC
GENZ GM POT
WFC BIDU CCI WMB
% Overlap20 most popular hedge fundholdings for Q4 2010*
* Based on 178 hedge funds tracked by AlphaClone
Source: AlphaClone
% Overlap3 most popular hedge fundholdings - Q3/99 to Q3/10
Q1
10
Q1
09
Q1
08
Q1
07
Q1
06
Q1
05
Q1
04
Q1
03
Q1
02
Q1
01
Q1
00
5%
10%
15%
20%
25%
30%
35%Most Crowded 2nd Most 3rd Most
Source: AlphaClone
Outperformance is due to luck
Myth #3
french/fama study
2%% of active mutual funds expected to outperform if selected randomly
2%% of active mutual funds that actually outperformed
“Luck vs. Skill In MutualFund Performance”
Luck Skill
Source: Fama/French Forum, “Luck vs. Skill in Mutual Fund Performance”
clone universe - top 20 holdings
2%% of active mutual funds expected to outperform if selected randomly
24%% of clones that outperformed by 2+ standard deviations
“Luck vs. Skill”
Luck Skill
Talent matters
All my alpha is in my “shorts”
Myth #4
clone vs. fund
2010 Fund (net)
Clone (gross: long)
Greenlight Capital 12.5% 21.3%Pershing Square 29.7% 25.9%Paulson & Co. 24% 19.4%Third Point 34% 25.8%Passport 18.3% 25.9%Perry Capital 14.6% 28.4%
Source: AlphaClone, “Clone vs Fund 2010”
clone vs. fund (cont.)
2010 Fund (net)
Clone (gross: long)
Millennium Mgmt 13.3% 15.7%SAC Capital 15% 20.3%Tudor Capital 7.5% 10.8%Jana Partners 8.4% 13.7%Och-Ziff 8.4% 9.2%Bridgewater 38% 24.9%
Source: AlphaClone, “Clone vs Fund 2010”
Myth #5
Hedge funds have very short holding periods
1 Average hedge fund holding period
Source: AlphaClone; Goldman Sachs
Year
New Buys Rank +3 Mos. +12 Mos.
MS 1 - -
XLE 3 - -
GT 4 4 13
XL 5 6 18
S 7 - -
ODP 13 13 27
OMX 16 15 29
BC 18 8 14
RAD 25 10 21
WLT 31 - -
Retention 6/10 6/10
New buy retention Q4 2008 (crisis)
Appaloosa
Source: AlphaClone
New Buys Rank +3 Mos. +12 Mos.
WFC 3 2 2
AMR 9 18 29
UAL 10 14 17
DAL 11 19 38
WSH 12 15 41
RBS 17 20 31
LCC 20 26 32
NAV 24 16 35
HPT 26 - -
COF 30 37 28
Retention 9/10 9/10
New buy retention Q4 2009
Appaloosa
Source: AlphaClone
5 cloning rules
ↂ bottoms-up vs macroↂ backtest: broad attributionↂ fof mindsetↂ protect downsideↂ automate and stick with it
questions?