Market Folly Custom Portfolio: Rebalanced, New Positions

With the onset of the third quarter 13F filings upon us, our Market Folly custom portfolio has just been rebalanced with new positions. We rebalance our holdings four times a year (once each quarter) to coincide with the latest hedge fund SEC filings. Since 2000, our portfolio has a total return of 865.6% and an annualized return of 25.7%. These numbers reflect the most recent performance as we just looked at them this morning. To see the latest positions our portfolio is investing in, head over to Alphaclone and then pull up the Market Folly portfolio from the list of 'Clones of Fund Groups'.

Our hedge fund-esque portfolio invests in various stocks held by a group of hedge funds we've hand selected. Over time, we've used our hedge fund tracking expertise to identify funds that outperform the markets and are easily 'cloned' due to their equity strategy and long-term investment focus. By focusing on hedge funds that typically employ long/short equity strategies, we ensure that we can see the majority of their long portfolio in the SEC filings to that we are replicating their portfolio efficiently. While we cannot see the short positions in their portfolio, we run our clone with a 50% hedge (short SPY) in order to run a hedged investment vehicle. We created it all with ease by using Alphaclone, truly the best hedge fund replication tool we've come across.

Below is a teaser shot of the 9 positions our portfolio currently holds. Each row represents one stock and by looking at the share price you can start guessing as to what position each is. The portfolio has five brand new positions this quarter and retains four positions from the previous quarter. Ignore the column on the far right regarding the quarter over quarter change in shares held, as we instead equal-weight all of our holdings. Let the guessing games begin:



As referenced earlier, the portfolio performance has been amazing. To learn more about our portfolio, head over to our introductory post. The Market Folly Custom portfolio is ranked #1 on Alphaclone's leaderboard as the top performing portfolio. It has a Sharpe Ratio of 1.1, beta of 0.2 and a correlation to the index of 0.2. As always, we'll continue to provide performance updates on how our portfolio is faring every single month. For those of you trying to replicate our portfolio on Alphaclone, keep in mind that we are using a market cap screen that omits companies with a market cap of greater than $50 billion from our clone. Now that the replicator just rebalanced, click here to see the new positions our portfolio holds. Upon signing up for Alphaclone you can see our positions and invest right alongside our portfolio to generate these outstanding returns for your own account. We cannot stress enough that it is the best hedge fund replication tool out there.

Market Folly Custom Portfolio Ranked #1 On Alphaclone Leaderboard

We have some fantastic news to report in that our very own Market Folly custom 'hedgefundesque' portfolio is ranked #1 on Alphaclone's leaderboard for all fund strategies! Upon checking out their leaderboard, we discovered that if you select the 'max' date-range and search for 50% hedged strategies, our clone is ranked #1 out of all the various funds they track with a total return of 878.3%, an annualized return of 26.1%, and Alpha of 23.4 all since January of 2000. This of course is the portfolio we post updates on each month. The portfolio takes positions from 3 handpicked hedge funds we've selected and combines them into a cohesive hedgefundesque clone by taking the top 3 holdings of each fund, equal weighting them, and then employing a 50% market hedge.

What's even more impressive to us is the fact that not only is our MF clone ranked #1, we have 5+ more iterations of our clone ranked in the top 25 of Alphaclone's leaderboard. These other MF clones simply take our portfolio and use different strategies such as 'top 2 holdings,' 'top 5 best ideas,' etc. If you have an Alphaclone account, head over there and click on 'leaderboard' on the top and play around to see what funds have the best returns in the cloning universe. Our clones make an appearance in almost every category you select and we're quite proud of this feat. If you don't have an Alphaclone account, take advantage of their 14-day free trial to check our portfolio out and to see the leaderboard.

Here's a screenshot we took of the current leaderboard:

(click to enlarge)

And as always, here's our latest performance update from the month prior:

October 2009
Market Folly clone: -3.0%
S&P 500: -1.9%

YTD 2009
MF: +11.9%
S&P 500: +17.0%

Total return since January 2000
MF: +878.3%
S&P 500: -15.1%

Annualized return
MF: +26.1%
S&P 500: -1.6%

And here is a screenshot of the current performance overview:

(click to enlarge)

Our Market Folly 'hedgefundesque' portfolio is now up 11.9% year-to-date versus 17% for the S&P500, continuing its role as a hedged instrument that captures some, but not all of major upward moves and protects from downside risk. Head over to Alphaclone to see the positions our portfolio is currently holding and make note that here in the next 2 weeks our clone will rebalance with new holdings to reflect the latest 13F filings.

If you're unfamiliar with the MF portfolio, check out our introductory post here. We'll continue to post up monthly performance an ongoing basis. Definitely stay tuned in the next two weeks when our portfolio rebalances with new positions. Not to mention, we'll be *updating* our fund to better position it going forward in an effort to select fund managers we think will outperform over the long-term. Stay tuned to see what up and coming hedge fund we add into the mix.

Free 14 Day Trial of Alphaclone

Hey everyone, great news: Mazin the co-founder of Alphaclone has informed me that they are now giving out free 14-day trials to the full membership package. This is something you all cannot pass up as it will give you an inside look at how you can truly replicate a hedge fund portfolio. This free trial to the full membership gives you access to all the hedge fund portfolios, to unlimited clones, unlimited clone groups, and the ability to create custom groups like we did with our custom portfolio that is seeing 27.9% annualized returns!

Those of you who have been wanting to check it out now have a prime opportunity to do so with full access for free. And, for those of you who have gotten the basic membership, you can still get the free trial of the full access to see what you might be missing out on. You can get your free 14 day trial of Alphaclone here.



If you're unfamiliar with Alphaclone, then check out our introduction to this hedge fund portfolio replication tool and also check out our MarketFolly clone.

WisdomTree Creates Hedge Fund ETFs

Sigh... when will it end? Exchange traded funds (ETFs) that try to imitate hedge funds are all the rage in the investment world these days. Previously, we've covered the release of QAI, a hedge fund ETF. We criticized that vehicle because it merely invested in other exchange traded funds and acted like a fund of funds rather than an individual hedge fund strategy. Then, more recently, we detailed the release of mutual funds using hedge fund strategies. In particular, we focused on the Turner Spectrum Fund which will pursue various long/short equity and market neutral strategies. This time around, a new firm has entered the hedge fund ETF arena.

WisdomTree is known for creating their fundamentally weighted ETFs, typically centered around dividends and profits. Now, however, they are turning to actively managed ETFs in an effort to expand their product line. And, they certainly have quite the consultant on board to help them do so. After all, hedge fund pioneer and legend Michael Steinhardt is WisdomTree's chairman. (We recently covered Steinhardt's thoughts on the markets here). So, we would like to assume/hope that Steinhardt had some say in the creation of these vehicles. But, who knows, as stupider things have happened in this world.

WisdomTree is rolling out three actively managed ETFs including a Real Return fund, a Managed Futures fund, and a Long-Short fund. The Real Return fund will play the inflation thesis by investing in TIPS, other fixed income securities, and commodities. This fund is specifically targeting to outperform the inflation rate going forwards. Their Managed Futures fund will be quantitative in nature and will invest in futures contracts, primarily in commodities. Lastly, the Long-Short fund will use pairs trades derived from their already existing ETF family and will run market neutral.

Overall, it sounds like they are taking a solid approach in their Managed Futures fund, as this could help give retail investors further opportunity to invest in the futures markets. Their Real Return fund will essentially just be a basket of inflation plays and off the cuff doesn't seem like anything particularly special. Lastly, the Long-Short fund is not as enticing to us because they are merely doing pairs trades with their pre-existing ETFs, something we could do on our own without paying the expense ratio. And, speaking of expenses, WisdomTree has yet to reveal the costs of each fund. The other thing to highlight here is that these will be actively managed ETFs, so the allocations of each fund will ultimately be up to the fund manager. And that is where things could get interesting, dependent upon how 'active' they actually are.

Overall though, vehicles like these have not entirely impressed us. Instead of investing in these newer and unproven products, we'd recommend taking a more direct approach and using Alphaclone to clone hedge fund portfolios directly based on equity positions the underlying hedge funds actually hold. After all, we did just that with our custom Market Folly portfolio and we've seen 19.8% annualized returns since mid-2002 and are even up 14.4% year-to-date for 2009. Or, if you want to take an even more do-it-yourself approach, we'd recommend reading Mebane Faber's book, The Ivy Portfolio, where he details how to invest like the top endowments and hedge funds. (Our review of the book here).

Its obvious that these ETFs aren't going anywhere and we're sure that even more are in the pipeline. Once we get enough datapoints to truly track their performance and correlation, we'll do a follow-up post on all the vehicles we've previously covered. On the bright side, at least we've found a new bull market: investment vehicle creation.

Alphaclone: The Ultimate Hedge Fund Portfolio Replication Tool

If you're going to read one Market Folly article for the rest of the year, then this is the one you'll want to read. Why, might you ask? Well, because we are about to introduce you to a tool that lines up directly with the content you see here at MarketFolly on a daily basis: hedge fund portfolios.

Today, we want to talk about Alphaclone (now 50% off), a web-based software tool developed by Maz Jadallah and Mebane Faber (of the World Beta blog). Quite literally, their tool allows you to create, customize, and replicate hedge fund portfolios. They have 200+ funds listed which can be turned into 15,000+ portfolio clones that are rebalanced quarterly and backtested on a daily basis. And, through a series of posts, we're going to show you what exactly you can do with this powerful tool.

We have been using Alphaclone for the past few weeks and are extremely impressed with vast array of information you can generate in a matter of minutes. You can create clones of individual managers (for instance: Greenlight Capital's portfolio) and can customize the existing portfolio or create your own based on criteria you define. Additionally, you can also create clone groups that create and track a portfolio of multiple managers. For instance, we just went through and for fun cloned a combination portfolio of 'activist' managers in Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, and Dan Loeb's Third Point. The combinations are endless.

You can also select various strategies and backtest their performance. You can take the top 10 holdings of an individual manager, the 'most popular' holdings from a group of managers, the 'best ideas' of managers, and many, many more options. You can also select a level of hedging (long only or hedged: 25%, 50%, 75%, 100%) to see how the portfolio performs when hedged. You can backtest tons of strategies and I've found myself sitting on Alphaclone for hours at a time creating unique hedge fund portfolios that outperform the S&P500 and various other indices.

Here are some of the highlights of Alphaclone, taken directly from their site:

• View clone performance annually or across several date spans
• Compare performance over time against several indexes
• View current and past holdings for each clone
• View recent trade activity for each clone
• Download a spreadsheet for any clone to view monthly return streams
• Hedge a clone portfolio and view back-tested performance
• Customize clones by changing the number of holdings and/or rebalance method
• Select which sectors and/or cap groups to include/exclude in the cloning process
• Clone your own fund groups

As you can see, there is tons of useful information here. Whether you are a retail investor, money manager, or hedgie yourself, this cloning tool will simplify your investment process. If you like the hedge fund portfolio posts we bring to you on a daily basis, then you are absolutely going to love Alphaclone.

To give you a quick look, we'll show you what Alphaclone pulls up for Warren Buffett's Berkshire Hathaway as an example. This first screenshot below shows the fund overview and highlights current portfolio holdings and sector breakdown.

(click to enlarge)

Directly below the Berkshire fund overview, we get to some of the good stuff: the clone generator. As you can see below, you have full control of what you wish to clone. You can select the number of top portfolio holdings to include (1,3,5,10, or 20) or you can shift to the "best ideas" tab, which opens up another set of criteria from which you can select the number of holdings. You can also select your rebalance method from holding all the positions equal-weighted, or you can "match the manager" where it will allocate the same percentage of the portfolio to each position as the hedge fund manager has deemed in their own portfolio. Next, you can also set hedging parameters. You can run long only, with a 25% hedge, a 50% hedge, a 75% hedge, or fully 100% hedged.

(click to enlarge)

Directly below the clone generator you can see the performance breakdown of your clone. You can select which indices to compare the clone to, and you can view the performance over a myriad of timeframes. Below the graph you have all kinds of useful information such as turnover, alpha, beta, and the correlation to the index. Additionally, Alphaclone shows you the volatility, sharpe ratio, and max drawdown comparatively as well. If you switch from the "1 year" to the "Annual data" tab, you can see performance data for the clone you've created against the index you've selected, broken down by each year. The historical information and backtesting is very comprehensive. And, you can export all of the info to Microsoft Excel, too.

(click to enlarge)

Lastly, at the very bottom of Berkshire's page, you'll see the current holdings as deemed by the portfolio clone you've selected. You can then see whether Berkshire has added to or reduced a specific position, and you can view their past portfolios as well.

(click to enlarge)

As you can see, there is an absolute wealth of information available, and that's only covering a single fund. Stay tuned, as next week we'll walk you through one of Alphaclone's pre-arranged fund groups: the Tiger Cub clone (a group of hedge funds that Market Folly readers should be very familiar with). This clone of all the ex-Tiger Management hedge funds has beaten the S&P500 by 15.5% annualized since 2000. And, we'll also be debuting a special Market Folly clone where we have hand selected a group of hedge funds for our own unique clone.

Head over and check out Alphaclone. It is easily one of the most useful financial market (and hedge fund specific) tools we've ever come across. And, they're running a special right now where you can get full membership for 50% off. They also have a basic membership setting and a free guest pass that has limited access. Once you get a taste of the possibilities, I guarantee you'll want to upgrade to full access. Full disclosure: I do receive a small commission if you sign-up, but I want to be explicitly clear that this is not some blind sales post; I approached them. I use Alphaclone on a daily basis and I think that fact speaks for itself. It has completely streamlined my hedge fund portfolio tracking/cloning process. If you try it out you'll see that it falls directly in line with what we do here at MF every single day. If you like MarketFolly, then you will love Alphaclone, it's as simple as that.

Update: Our 2nd article on Alphaclone is now up as well. This next article details how you can combine multiple hedge fund managers into one cohesive portfolio. In particular, it focuses on the Tiger Cub hedge fund managers. Enjoy the second post!