Custom Hedge Fund Portfolio Created With Alphaclone: Part 2 ~ market folly

Friday, April 24, 2009

Custom Hedge Fund Portfolio Created With Alphaclone: Part 2

Ok, so we're back with the second installment of our custom Market Folly hedge fund portfolio created with Alphaclone. Last week, we unveiled our special portfolio that is a unique blend of 3 separate hedge funds: Eric Mindich's Eton Park Capital, Seth Klarman's Baupost Group, & Shumway Capital Partners (Chris Shumway). After a month straight of creating various portfolios, we finally found the right combination. The portfolio we created last week looks at the top 5 holdings from each of those hedge funds (equal-weighted) and meshes them into one portfolio of 15 holdings. We ran the portfolio with a 50% S&P500 hedge (which can be achieved by shorting SPY). When all was said and done, we saw that since August 2002, our Market Folly 'Top Holdings' portfolio has seen Alpha of 15.5 and a total return of 194.5% versus the S&P500 return of only 6.6%. It also has seen annualized returns of 17% versus the S&P annualized of 0.8%. As you can see, that's some solid performance. We created it all with Alphaclone, which you can get currently with a 50% discount. We use it every single day and highly recommend it if you're interested in creating portfolios based on hedge fund holdings.

This week, we're going to examine a portfolio based on the top 5 'best ideas' of each of those hedge funds. So, before we begin, make sure you check out the introduction to Alphaclone, our post on the Tiger Cub portfolio, as well as our previous post on our custom Market Folly clone.

The Market Folly 'Best Ideas' Portfolio

This week we've gone with a slightly different strategy. One of the other options Alphaclone has is it lets you run a portfolio based off a hedge fund manager's "best ideas." The rules associated with this clone strategy are:
1. Buy manager(s) top “new buys” as determined by the market value of the holdings.
2. Sell when manager(s) reports holding as sell out
3. Sell if the number of shares held by a manager decreases by 50% or more from the original amount.
4. Limit clone portfolio to no more than 50 holdings selected first on the basis of whether they are a new buy and next based on the % Portfolio of the holding.

So, we've taken the best ideas of the 3 hedge funds in our portfolio group to create a custom portfolio. You have the option to select either the top 1, 2, 3, or 5 best ideas from each fund. In our case, we've selected the top 5 best ideas from each hedge fund. And, as we mentioned earlier, we also set it up with a 50% S&P hedge, as we always like to run our portfolios hedged. Here's what the inputs look like on the Alphaclone screen:

(click to enlarge)

As we've touched on in previous posts on Alphaclone, you can configure your funds in numerous different ways, so it's totally customizable.

The Performance

Now, let's take a look at how the fund has performed over time. Overall, the results are quite impressive. Since August 2002, the Market Folly 'Best Ideas' Portfolio has seen a total return of 128.1% versus the S&P500 return of only 8.2%. The graph below shows our portfolio in green and the S&P in blue.

(click to enlarge)

Our portfolio has also seen an annualized return of 13.5% versus only 1.2% annualized for the S&P. Yet again, we've achieved some nice outperformance. And, we've done so with 11.8 Alpha, 0.8 Beta, and 0.6 correlation to the index. Our portfolio has achieved these results with a Sharpe Ratio of 0.5 (versus S&P -0.2) and has also seen less drawdown than the S&P. However, we did see slightly more volatility than the S&P. Overall, the portfolio is definitely a success and has outperformed the S&P. Let's also take a look at our year by year performance, as Alphaclone breaks it all down for us:

(click to enlarge)

As you can see, our portfolio is massively outperforming the S&P500 thus far in 2009. We have seen a 26.7% year to date return versus the S&P return of -5.8%. Additionally, you'll note that in both bear markets of 2002 and 2008, our portfolio outperformed the index by a wide margin. Out of 8 years, our clone has only underperformed in 2 of those years. And, the massive outperformance in the other 6 years more than makes up for that slight hiccup. Alphaclone gives you a great performance breakdown and gives you the ability to export all the data to Excel as well. After all is said and done, our portfolio has a total return of over 128% versus S&P's return of only 8.2%. That is outperformance over the long term at its finest.

The Holdings

Lastly, let's take a quick look at what our 'best ideas' holds in its portfolio that is currently achieving such massive outperformance. Remember, Alphaclone automatically rebalances the portfolio for you each quarter and tells you which securities to buy and sell (if you wished to mimic this with real money). As you'll see from the tabs on the screenshot below, you can see the recent transactions, as well as check out what the portfolio held in previous quarters. Alphaclone perfectly backtests everything based on the SEC filings that we like to cover on Market Folly. Without further ado, the holdings:

(click to enlarge)

Make sure to ignore the "% of Portfolio" column on the screenshot above. That column references how big a specific position is for its owner's hedge fund portfolio. So, when you see that Hansen Natural (HANS) makes up 10.3% of the portfolio... it means it is 10% of Eton Park's portfolio. All of our positions in the portfolio we've customized are equal-weighted. So, each of our holdings would get a 6.66% allocation. As you can see, our portfolio holds a wide variety of names and has severely outperformed the S&P thus far in 2009. It will be interesting to examine our portfolio again once Alphaclone automatically rebalances the holdings in May. We'll be posting an update once that happens.

The Comparison: 'Top Holdings' Versus 'Best Ideas'

In our custom Market Folly portfolios, we've created two different clones with Alphaclone that have both outperformed the S&P by a huge margin. However, one of our clones was even more successful than the other. Drumroll please: And the winner is......... The Top Holdings Portfolio.

If you compare the portfolios side by side, here's what you get:

1. The 'Top Holdings' Portfolio: Total return of 194.5% since August 2002; Annualized return of 17%
2. The 'Best Ideas' Portfolio: Total return of 128.1% since August 2002; Annualized return of 13.5%
3. S&P500: Total return of 5.6% since August 2002; Annualized return of 0.8%

While both of our portfolios easily outperform the S&P500 over the long term, the 'top holdings' portfolio goes above and beyond. As such, it is currently our selection for our custom Market Folly portfolio that we will be tracking on the blog from here on out. With the customization of Alphaclone, we were able to create thousands of custom portfolios and we've finally found the one that dominates.


Hopefully you've enjoyed walking through our journey of creating a custom portfolio with Alphaclone. (We're starting to wonder if we're addicted to this tool since we use it everyday). Alphaclone is currently 50% off, so definitely check it out while the offer lasts. It is truly customizable and you'll be hooked for hours once you start to create portfolios. And, as illustrated above, you can come up with some massively outperforming strategies that you can put real money behind.

If you've missed our previous posts on hedge fund portfolio creation, check out our introduction to Alphaclone, our fund of funds (the Tiger Cub clone), and our custom Market Folly portfolio we created last week. If you have any questions or comments, feel free to mention them below or drop us an email.

Stay tuned, as we're going to start a contest in the near future to see who can customize the most dominant portfolio with Alphaclone. We want to find out which readers can take down our total return of 194.5% since mid-2002 and an annualized return of 17% with a custom group of funds. Be on the lookout and get ready to bring it on!

*Please note that all our Market Folly portfolios have a filter set at the very beginning of the Alphaclone custom portfolio process where we exclude positions with a market cap greater than $50 billion. We still allow all sectors and all other market caps. If you wish to replicate our portfolio with Alphaclone, just make sure when you create your custom fund group that you 'uncheck' the "greater than $50 billion market cap" box at the beginning, so that those positions are excluded from the portfolio. We did this because we found that slightly better performance could be achieved when enabling this filter.

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