Creating the Tiger Cub Hedge Fund Portfolio With Alphaclone ~ market folly

Thursday, April 9, 2009

Creating the Tiger Cub Hedge Fund Portfolio With Alphaclone

Last week, we introduced you to the ultimate hedge fund portfolio replication tool that we use on a daily basis: Alphaclone. We walked you through the basics of the web-based tool and showed you how you can track a hedge fund portfolio. Since they're running a 50% discount right now, we're going to show you the advanced features this week and detail how you can create custom clones made up of multiple hedge funds. So, before we get to it, make sure you check out our introduction to Alphaclone.

In order to illustrate Alphaclone's unique ability to combine multiple hedge fund portfolios into one streamlined portfolio, we're going to look at their pre-made clone: The Tiger Cub Portfolio. As regular Market Folly readers are well aware, the 'Tiger Cubs' are hedge funds ran by managers who used to ply their trade at Julian Robertson's legendary hedge fund: Tiger Management. When Tiger disolved, many of these analysts and managers went on to start their own hedge funds such as: Maverick Capital, Blue Ridge Capital, Shumway Capital, Viking Global, and many more. These funds are pretty well known and have solid track records themselves. And, most notably, they are excellent stock pickers, which is why we track them here at Market Folly. The numbers speak for themself: The clone of the ex-Tiger Management hedge funds has beaten the S&P 500 by 15.5% annualized since 2000.

How the Portfolio is Created

The Tiger Cub portfolio takes the portfolios of 21 hedge funds and lets you dial it down into one collective portfolio, which you can ultimately control the settings of. When you pull up the Tiger Cub clone in Alphaclone, here's what you see: The clone lets you select a portfolio based on 1 of 3 ways. First, you have the option to select positions by the top holdings. This portfolio will take the top holding of each Tiger Cub and combine it into a collective portfolio. You can also choose the top 2, 3, or 5 holdings from each Cub to put into the clone. Under this setting, you equal-weight all of the holdings and you can run it as a long only fund, or you can hedge it, with hedges at either 25%, 50%, 75%, or 100%. Backtesting all the various scenarios is very helpful here, and Alphaclone does it all for you automatically.

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Second, you can also choose to select a portfolio based on the Cubs' "best ideas." In this clone, you can choose the 1, 2, 3, or 5 best ideas from each of the 21 Tiger Cubs. This compiles a portfolio based on the positions they added to the most over the last quarter. What's great about this portfolio setting is that you can instantly see what positions they've been adding to in size very recently. This setting also uses equal-weightings for each position and gives you the option to run long only or to hedge (at either 25%, 50%, 75%, or 100%).

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Lastly, you also have the option to run the clone based on the 'popular' positions. This portfolio takes the most commonly occurring positions across the 21 Tiger Cub portfolios. You can select a portfolio based on the single most popular holding, the 3 most popular holdings, the top 5, the top 10, or even the top 20 most common positions amongst them. This portfolio setting is especially interesting in the Tiger Cub clone because as we've illustrated on the blog before, the Cubs often have high portfolio correlation. And, as always, you can run this portfolio long only, or hedged to whatever degree you please.

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Portfolio Performance

As you can tell, there's a ton of different portfolios you can create and backtest. To give an example, let's look at the top 10 most popular holdings (the holdings most commonly appearing amongst the Cubs). We'll run this equal-weighted and 50% hedged. Based on these settings, Alphaclone tells us we have 15% turnover, 7.5 alpha, 0.5 beta, and 0.6 correlation to the S&P 500. The max drawdown of -31.8% is significantly less than that of the S&P as well. You'll notice that this specific portfolio clone is up 16.6% for 2009 thus far, compared to S&P -9%, which is some significant outperformance. And, this specific clone has outperformed 8 of the past 10 years.

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Portfolio Holdings

Then if we scroll down to our clone portfolio holdings, it shows us our ten holdings. The first position on the list is Qualcomm (QCOM), with 10 of the Tiger Cubs owning it. The second is Mastercard (MA), with 8 Cubs owning it. And, as you go down the list, you see some very solid names.

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You can also click on the 'Past Portfolios' tab to show what the portfolio would have held over the past 2 quarters and then compare it to the current holdings. With this setup, you merely rebalance the portfolio 4 times a year (each time the 13F filings come out), and you're good to go. The 'Recent Trades' tab shows you which securities to sell and which to buy in their place for each rebalance period. As you can see, it really is very easy to run a hedge fund portfolio clone.

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Keep in mind that we've only illustrated one of the ways to create the clone. You can also do it based on 'top holdings' or 'best ideas' and then run long only or adjust the hedging on each setting. So, now that you know how to clone a portfolio based on a group of multiple hedge funds, the options in Alphaclone are endless. Think about that for a second. You can take any of the hedge funds listed in the database and you can mix and match and combine as few or as many of them as you like. Once you've created your single portfolio based on multiple hedge fund managers, you can drill it down and decide how to run the portfolio. You can pick their top holdings, their best ideas, or the securities that are the most commonly held between the funds you've selected.

Stay Tuned Next Week

This ability to create a single portfolio based on the ideas of multiple hedge fund managers is one of Alphaclone's best tools. It saves you thousands of hours of digging through tons of hedge fund filings. And, it lets you backtest those portfolios using all the historically accurate portfolio information. To truly harness the capability of Alphaclone, we've spent a ton of time tweaking various clones and have finally created our own MarketFolly clone. Stay tuned next week when we'll reveal the hedge funds we've selected, the strategy, & the subsequent portfolio holdings for our very own MarketFolly clone.

If you want to create your own hedge fund portfolios or clone those of existing hedge funds, Alphaclone is your tool. We use it on a daily basis and now you can track & clone hedge fund portfolios just like we do. As we mentioned before, they are offering a 50% discount, so take advantage of that before it disappears. If you missed it, make sure to also check out our introduction to Alphaclone.

*Update: The Market Folly custom portfolio has been revealed.

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