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5 MYTHS ABOUT
CLONING HEDGE FUNDS
Future of Finance Webinar Series
Presenter: Maz Jadallah, Founder/CEO, AlphaClone
Moderator: Zack Miller, Author, Tradestreaming.com
Date: May 9th @ 4pm EST, 1pm PST
important disclosures
Investing 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 based
ↂ   disclosure based
ↂ   automated
ↂ   repeatable
Myth #1




    45 day delay in filing renders disclosures useless
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
clone vs. fund
2010                                       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”
Myth #2




          Many hedge fund trades are “crowded”
Implication




Little guy gets hurt when funds exit
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     25
Source: AlphaClone
% 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 10
Source: AlphaClone
Myth #3




          Outperformance is due to luck
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                       outperformed

Source: Fama/French Forum, “Luck vs. Skill in Mutual Fund Performance”
clone universe - top 20 holdings
“Luck vs. Skill”




2% 24%  Luck
% of active mutual
                                 Skill
                     % of clones that outperformed
funds expected to    by 2+ standard deviations
outperform if
selected randomly
Talent matters
Myth #4




          All my alpha is in my “shorts”
clone vs. fund
2010                                       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”
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”
Myth #5




     Hedge funds have very short holding periods
1         Year


                         Average hedge
                         fund holding
                         period



Source: AlphaClone; Goldman Sachs
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
New Buys    Rank +3 Mos. +12 Mos.
Appaloosa             WFC            3       2        2
New buy retention AMR                9      18       29
Q4 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
5 cloning rules

ↂ   bottoms-up vs macro
ↂ   backtest: broad attribution
ↂ   fof mindset
ↂ   protect downside
ↂ   automate and stick with it
questions?

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5 Myths About Cloning Hedge Funds

  • 1. 5 MYTHS ABOUT CLONING HEDGE FUNDS Future of Finance Webinar Series Presenter: Maz Jadallah, Founder/CEO, AlphaClone Moderator: Zack Miller, Author, Tradestreaming.com Date: May 9th @ 4pm EST, 1pm PST
  • 2. important disclosures Investing 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.
  • 3. intro Zack Miller, Author, Tradestreaming.com Maz Jadallah, Founder/CEO, AlphaClone
  • 4. clone? Quant investment strategy that derives buy/sell decisions from public disclosure filings
  • 5. clone? ↂ rules based ↂ disclosure based ↂ automated ↂ repeatable
  • 6. Myth #1 45 day delay in filing renders disclosures useless
  • 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. clone vs. fund 2010 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. Myth #2 Many hedge fund trades are “crowded”
  • 10. Implication Little guy gets hurt when funds exit
  • 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 25 Source: AlphaClone
  • 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 10 Source: AlphaClone
  • 13. Myth #3 Outperformance is due to luck
  • 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 outperformed Source: Fama/French Forum, “Luck vs. Skill in Mutual Fund Performance”
  • 15. clone universe - top 20 holdings “Luck vs. Skill” 2% 24% Luck % of active mutual Skill % of clones that outperformed funds expected to by 2+ standard deviations outperform if selected randomly
  • 17. Myth #4 All my alpha is in my “shorts”
  • 18. clone vs. fund 2010 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. 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. Myth #5 Hedge funds have very short holding periods
  • 21. 1 Year Average hedge fund holding period Source: AlphaClone; Goldman Sachs
  • 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. New Buys Rank +3 Mos. +12 Mos. Appaloosa WFC 3 2 2 New buy retention AMR 9 18 29 Q4 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. 5 cloning rules ↂ bottoms-up vs macro ↂ backtest: broad attribution ↂ fof mindset ↂ protect downside ↂ automate and stick with it