GURU ETF Does Not Replicate Hedge Fund Performance

Global X announced yesterday that it was going to launch an ETF that mimics the moves made by hedge funds on the market. The Global X Top Guru Holdings index (NYSE:GURU) supposedl follows hedge funds based on their 13F filings with the SEC for each quarter.
A similar fund was opened by AlphaClone last week. The fund name is the AlphaClone Alternative Alpha Index (NYSE:ALFA). Although, we have not examined this fund in particular.
This article focuses on the GURU ETF.

The funds seem like an interesting investment, and the idea may well catch on, but there are many reasons to be wary. Many investors will know the facts stated below, but it is necessary to reiterate them.
By definition, in a hedge fund’s 13F filings they disclose what equities they were holding at the end of the previous quarter. These disclosures have to be made within 45 days of the close of the quarter.
First of all, the 13F filings which the ETFs are ‘tracking’ will not clone hedge fund performance. The filings have to be made, legally, within 45 days of the end of a quarter. Most funds wait out that entire period and file their reports on the last possible day.
That leaves the new ETF at least 45 days behind the market. Much can change in a 45 day period, and the ETF will be vulnerable to those changes. This leaves the ETF far behind both the long thought out and split second decisions made by hedge funds. It is the brain power behind these funds that lead to their success.
The fund will only track hedge funds that disclose more than $500 million in its ETF filings. It will also weed out hedge funds that tend to have a high equity turnover, though it is not clear what the fund considers high.
Hedge funds tend to hold more than just equities in their portfolios. They hold bonds and commodities and many other types of investment. Most movements unaccounted for by the index, leading to even greater inaccuracies along with the market lag.
Seth Klarman’s Baupost Group is an excellent example. It has $24 billion under management but only about $3 billion in equities. The other $21 billion, remarkably few people know what it consists of. We have sources at Baupost who told us its 22% cash, and the rest in a lot of private assets like real estate, along with many European stocks. Readers would not know that information if they were not viewing this article. Additionally, the GURU etf will not track 88% of Klarman’s fund holdings.
Institutional investors are required to file with the SEC when they purchase 5% of a publicly traded company. This is the 13D, or sometimes 13G filing and must be made within ten days of acquiring the stake.
The hedge fund tracking ETFs, which mimic on 13F filings, will not take these positions into account. They are in the public eye, but the hedge fund ETF does not see them. This is another significant inaccuracy and disadvantage.
ETFs can be dangerous. We’ve seen that before. The instruments are little understood and untested in many market environments. The general ETF problems apply to hedge fund ETFs, but they are not the crucial issue here.
The issue is that these funds that purport to follow the moves made by the biggest and most successful hedge funds do nothing of the sort.
Retail investors looking to mimic hedge funds may be attracted to these ETFs. Like everything else in finance, there are no promises. The design is poor, and with the Guru X following 68 funds, the cumulative disconnect between the ETF and the index it is supposed to follow is a chasm.

What's in a name? Baupost Group

Teaching, it has been said, provides its own reward. For a group of professors at the Harvard Business School, having Seth Klarman – founder of Boston-based hedge fund firm Baupost Group – as a pupil proved to be a little more than that.
Baltimore-raised Klarman impressed his professors at Harvard Business School to such an extent that a group of them pooled their money to help him form his firm, the founder using the first letters of said seed investors’ last names as the basis for the endeavour’s name – Baruch, Auerbach, Poorvu and Stevenson.
Klarman has proved he warranted his professors’ faith by returning 19% annually since the fund launched in May 1982. Baupost, among the world’s 20 biggest hedge fund managers, is now thought to oversee AuM of around $24bn.
The successful hedge fund manager wrote a book in 1991 called Margin of Safety, that outlines his investing philosophy. The out-of-print book now sells on Amazon for upwards of $800. One suspects Baruch, Auerbach, Poorvu and Stevenson have their own copies already. No doubt signed by, surely, their most rewarding investment to date.

Seth Klarman Buys More Idenix Pharma, NovaGold, Theravance Inc, Sells Microsoft, BP, Genworth

Renowned value investor Seth Klarman just reported his first quarter portfolio. He did not buy any new stocks, but added to his positions in Idenix Pharma, NovaGold, Theravance Inc. He reduced his positions in Microsoft Corp, BP Plc. He sold out his position in GenWorth, PDLI Biopharma, Targacept Inc. As of 03/31/2012, The Baupost Group owns 20 stocks with a total value of $3 billion.

We have reported before that Seth Klarman gave up Targacept; sold out this position in our Real Time Picks . Mr. Klarman apparently has given up hope that the company will recover from its stock price collapse.

In understanding how Seth Klarman invests, we can look at his own words. He separates value investors into three categories. The first group buys cigar butt at cheap prices. The second buys high quality companies at low prices. The third buys high quality companies at fair prices. He thinks that Warren Buffett belongs to the third group; he himself belongs to the first group.

These are the details of the buys and sells.

• Added Positions: IDIX , NG , THRX ,
• Reduced Positions: MSFT , BP , ALR , MGAM ,
• Sold Out: GNW , PDLI , TRGT ,

Seth Klarman Betting Big On These 2 Stocks

Seth Klarman's Baupost Group is one of the largest hedge funds and regarded very highly in the world of "Graham-Dodd" value investors. Seth Klarman is also the author of "Margin of Safety" (which is out of print and retails for $1,500), which reflects his views on investing and he is revered among investors. After graduating from Harvard Business School one of his professors, Bill Poorvu (also known as a shrewd real-estate investor), asked him to help manage money for his company Baupost (which combines the names of his partners Howard Stevenson, Jordan Baruch and Isaac Auerbach).
While Baupost is not solely focused on U.S. equities, because of Klarman's long-term view and relatively low turnover, there is a lot of information to be gleaned from looking at his reported equity positions over time. This reason, coupled with Klarman's stock-picking ability, makes Baupost one of the more profitable funds to clone over time and is included in our AlphaStratus Select portfolio.
In Q4 of last year, Klarman made some big changes in the portfolio, most notably:

• Shares in Theravance Inc. (THRX) increasing 42%
• Shares in NovaGold (NG) Increasing 49%
• Shares in PDL BioPharma (PDLI) decreasing 49%
• Shares in Idenix Pharma (IDIX) increasing 127%

In Q1 of this year, Klarman didn't add any new stocks but dropped: PDL BioPharma, Targacept Inc. and Genworth Financial (which was a top 10 position). Notable changes among top 10 positions in Q1 include:

• Reducing shares in BP by 22%
• Reducing shares in Microsoft (MSFT) by 42%
• Increased shares in IDIX by 46% (combined with an increase in market value to make it a top 10 position)
• Increased shares in NG by 34% (now a top 10 position)

NovaGold was a new position in Q3 2011 (5M shares) and Klarman added 2.5M shares in Q4 2011 and another 2.5M in Q1 2012. This is a popular stock among hedge funds with Tradewinds, Paulson & Co., York, Chilton and Blue Ridge all holding meaningful positions:

Idenix Pharmaceuticals Inc. started in the portfolio in Q2 2011 at 1.2M shares ($6.2M dollars). Klarman has added significantly to this position every quarter since and the position now stands at $81M and represents about 3% of all reported longs (and is a top 10 position):