5 Myths About Cloning Hedge Funds

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Presentation by Maz Jadallah, Founder/CEO at AlphaClone, on five common misconceptions about using hedge fund public disclosures to make investment decisions.

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5 Myths About Cloning Hedge Funds

  1. 1. 5 MYTHS ABOUTCLONING HEDGE FUNDSFuture of Finance Webinar SeriesPresenter: Maz Jadallah, Founder/CEO, AlphaCloneModerator: Zack Miller, Author, Tradestreaming.comDate: May 9th @ 4pm EST, 1pm PST
  2. 2. important disclosuresInvesting in fnancial markets involves risk, including the risk of principal loss. Information in this presentation is in noway 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 performanceresults are provided for purposes of illustrating historical performance had a core strategy had been available duringthe relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makesno 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 frombacktested 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 ensurethe accuracy of the information.© 2010, AlphaClone LLC, All Rights Reserved. The AlphaClone logo is a service mark of AlphaClone LLC.
  3. 3. introZack Miller, Author, Tradestreaming.com Maz Jadallah, Founder/CEO, AlphaClone
  4. 4. clone? Quant investment strategy that derivesbuy/sell decisions frompublic disclosure filings
  5. 5. clone?ↂ rules basedↂ disclosure basedↂ automatedↂ repeatable
  6. 6. Myth #1 45 day delay in filing renders disclosures useless
  7. 7. 1/3 Average On average, 1 in 3 clone portfolios outperformed the S&P500 by 10 percentage points or more (2000 to 2010)Source: AlphaClone
  8. 8. clone vs. fund2010 Fund Clone (net) (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”
  9. 9. Myth #2 Many hedge fund trades are “crowded”
  10. 10. ImplicationLittle guy gets hurt when funds exit
  11. 11. 35% % Overlap 20 most popular hedge fund 30% AAPL holdings for Q4 2010* 25% C 20% GOOG 15% JPM BAC GENZ 10% GM POT WFC BIDU CCI WMB 5% 0% * Based on 178 hedge funds tracked by AlphaClone 0 5 10 15 20 25Source: AlphaClone
  12. 12. % Overlap 3 most popular hedge fund holdings - Q3/99 to Q3/10 Most Crowded 2nd Most 3rd Most 35% 30% 25% 20% 15% 10% 5%Q1 00 Q1 01 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10Source: AlphaClone
  13. 13. Myth #3 Outperformance is due to luck
  14. 14. french/fama study “Luck vs. Skill In Mutual Fund Performance” 2% 2% Luck % of active mutual funds Skill % of active mutual funds expected to outperform if that actually selected randomly outperformedSource: Fama/French Forum, “Luck vs. Skill in Mutual Fund Performance”
  15. 15. clone universe - top 20 holdings“Luck vs. Skill”2% 24% Luck% of active mutual Skill % of clones that outperformedfunds expected to by 2+ standard deviationsoutperform ifselected randomly
  16. 16. Talent matters
  17. 17. Myth #4 All my alpha is in my “shorts”
  18. 18. clone vs. fund2010 Fund Clone (net) (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”
  19. 19. clone vs. fund (cont.)2010 Fund Clone (net) (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”
  20. 20. Myth #5 Hedge funds have very short holding periods
  21. 21. 1 Year Average hedge fund holding periodSource: AlphaClone; Goldman Sachs
  22. 22. New Buys Rank +3 Mos. +12 Mos.Appaloosa MS 1 - -New buy retention XLE 3 - -Q4 2008 (crisis) 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 Source: AlphaClone
  23. 23. New Buys Rank +3 Mos. +12 Mos.Appaloosa WFC 3 2 2New buy retention AMR 9 18 29Q4 2009 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 Source: AlphaClone
  24. 24. 5 cloning rulesↂ bottoms-up vs macroↂ backtest: broad attributionↂ fof mindsetↂ protect downsideↂ automate and stick with it
  25. 25. questions?

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