Tom Brakke discussed an interesting new fund on his site yesterday. The fund tracks the 13-F filings from hedge fund “gurus” and allocates assets accordingly. The ticker is GURU. There’s a similar fund from AlphaClone with the ticker ALFA.
Anyhow, I have to admit that I’ve always been skeptical of buying stocks based on 13-F reports. There are too many unknowns involved. You don’t know when the “guru” bought, if they still hold, if they’re net long, etc. It also just goes against common sense that this could be a viable strategy in the long-term. If the gurus were that good and everyone started tracking their performance and holdings then the market would increasingly arbitrage any potential gains away from the positions and could even create an environment where stocks get an unhealthy boost in the near-term that doesn’t hold in the long-term. There have been studies on this sort of impact due to Jim Cramer’s show and the way near-term pops often end up being poor near-term holdings due to excess near-term optimism being priced into the shares.
I did a quick back of the napkin review of the fund and my head almost exploded when Morningstar benchmarked the fund against the large blend benchmark. But the large blend benchmark has an average market cap of $45B while the GURU fund has an average market cap of $11B. The category average in large blend has a market cap of $95B. The fund currently has 45% of its assets in large or megacap holdings. That means the majority of the holdings are mid-cap or small-cap holdings. So it’s more like a mid-cap fund maybe teetering on the end of a large cap fund. But it’s not benchmarked correctly which drives me crazy. If we’re not going to benchark things correctly then why even bother trying to compare them to something?
I digress. I actually looked at the holdings and decided to compare the fund to what it currently holds – mostly mid-caps and 10% Europe with the rest in domestic equities. The fund’s lifetime is brief, but its performance is huge. It’s generated a 56% return in just 13 months with a standard deviation of 8.8 and a Sharpe ratio of 3.61. The mid-cap/Europe combo is up 40% with a standard deviation of 8.8 and Sharpe ratio of 2.6. The drawdowns are slightly in favor of the mid-cap/Europe combo though not by much.
I don’t know what to think here. The fund is really interesting. But it doesn’t have a long track record and I am still suspicious that we’re just looking at a beta junky fund here. In other words, is it just a suped up mid-cap fund that will get crushed when the market goes through the next big bear market? I don’t know. But I’d love to hear reader thoughts on it.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.