DISQUS

PeterD · 7 months ago

Jay,

I like Paulson's first rule of investing: protect your capital.

marketfolly · 7 months ago

A very prudent message, as always. That's why I always run a hedged book, no matter what.

Anonymous Insider · 7 months ago

Are you sure this Alphaclone 'backtest' is accruate? Is it using information when it became available (5/15) instead of the as-of date (4/30)? It also looked like the %-portfolio numbers added up to more than 100%. Bunch of other potential caveat / problems (we backtest across manager we know were successful). If you started this in 2003 you'd have been more likely to pick successful funds then (a number of which went out of business) and v v v unlikely to pick Shumway which was on no ones radar screen then. Baupost is another wierd example, supposedly he is running 8B or something, but we only see 1B in 13F securities. So it doesnt represent much of his portfolio.

I'd like to see a lot more skepticism on "is this robust?"

marketfolly · 7 months ago

Thanks for the comment.

Yes, the backtest is correct and let me try to provide with some more insight as to how it works. Each time a 13F is released each quarter, the Alphaclone portfolio waits five days until after the deadline when 13Fs are required to be reported. Then, on that 5th trading day, it rebalances the entire portfolio based on whatever strategy you are running (in this case for ours, it takes the top 5 holdings and makes sure they are either still the same or shuffles around the ones who need to be changed).

The % of portfolio you are referring to I think you're looking at the wrong thing. Don't look at how much % of the portfolio the security is of x hedge fund. We take the holdings that are compiled in that holdings list and then equal weight them in our portfolio. So, there are 15 holdings all equal weighted for an even 100% portfolio weighting. Then, on top of that, we add a 50% portfolio hedge of a short S&P500 position. Hopefully we're on the same page here, as I think you were just looking at how big the position was for the individual manager. Our portfolio equal weights all the collective holdings.

In 2003 you're probably right I might not have selected Shumway, but I would still have selected a Tiger Cub portfolio which was one of my criteria due to their track record. So, maybe I would have selected Maverick or Blue Ridge or the like. And, either way, the numbers are somewhat similar in terms of performance due to the high correlation among Tiger Cub portfolios. So, maybe not Shumway at the time, but one of his peers for sure which yield similar #s.

Baupost indeed runs a large amount of money. If you go through and search for Baupost on our site, you'll see that we've addressed this issue in the past. They've had a lot of money in Cash, as they haven't been able to find many "deals" in financial markets since they are a solid value player. But, as the markets have declined, they have started to find opportunities and have slowly been shifting money into equities over the past few quarters. I forget the exact amount (% of portfolio) that he had in cash, but he's been shifting a lot lately, and I'm sure we'll see this trend continue.

Any other issues you wish to clarify? Feel free to ask more, and hopefully this all helps.

Jay
marketfolly.com

Charlie · 7 months ago

Shumway Capital Partners has a quarter to quarter turnover rate of 85%. Isn't it hard to
know if one is buying what they still own? Or maybe their top picks do not change so
frequently?

marketfolly · 7 months ago

hey Charlie, the SEC filings that come out each quarter (and what the cloning process is based off of) detail their positions each quarter. So, Alphaclone automatically goes through and compares last filing to the current quarter filing and tells you what to buy and sell. I touched on this towards the end of the article above. The screenshot of the holdings page shows the other tabs where you can see the trades they have made and what positions they held in all the previous quarters. It really is a streamlined system and everything is taken care of for you, so you know what exactly to hold in your portfolio if you were wishing to implement it with real money. So, even if their top holdings did change, you would know exactly what to buy and sell.

Hopefully this clarifies, and let me know if you have any other questions.

Jay

inthewoods · 7 months ago

I agree with what someone else said earlier about selection bias on these funds, but more to the point, I think an interesting approach would be to take newer funds with small amounts of money under management - can AlphaClone do that?

Research has shown that going with "younger" funds with less assets under management outperforms....

The other concern I have about all of these funds is the large positions in ETFs - and my concern isn't for us - hell, that's fine for us small guys. But if I was investing with these guys and the fund was full of broad ETFs, I might feel that they weren't worth the fees. But that's just me - I'm sure everyone is just happy with positive returns right about now.

marketfolly · 7 months ago

Good points as always. Totally agree with the younger funds comment, as that has been documented numerous times. Hard to really find them all and track them though, since there are sooo many smaller funds to choose from. Alphaclone has a large number of funds in their database, I forget the exact number. It should say somewhere on their site though.

Also agree with your point about ETF rich funds. Most of the funds I look at in depth don't really have large ETF positions. They have ETFs, sure, but as a percentage of their overall portfolio they are pretty small. Any funds in particular you are referring to?

inthewoods · 7 months ago

Galleon comes to mind quickly (I'm sure there are others) with a 20% position in the SPY. That's essentially a market timing bet - and as I said, I'm sure their investors are very happy right now, but for me, if I'm "buying" a fund for individual stock picks, I'd like to see that reflected in the portfolio.

marketfolly · 7 months ago

Very true re: Galleon. But, you also have to consider that due to their deleveraging etc, a rather small portion of their overall portfolio was exposed to equities. So, even though that 20% of invested capital on the long side is pegged into SPY, its still a smaller portfolio allocation than they would normally have.. if that makes sense. The deleveraging has essentially scaled down everything.

It really just comes down to what the funds have laid out in their prospectus in terms of strategy, risk guidelines, and all those tiny details. Funds like Lone Pine, or Blue Ridge are pure stock picking funds and you will always see their portfolios with large individual stock positions. But, that's because its how their strategy was outlined from the start. Some funds have more leadway based on their strategy (global macro, event driven, etc).

I guess all I'm saying is its not fair to just label all hedge funds as "stock pickers" and assume that they're supposed to have large stock positions rather than ETFs. They are not all using the same strategy and taking the same risks. So, as an investor interested in stock picking, you would only be looking at funds who are usually heavy in equities to start with (i.e. Lone Pine, Blue Ridge, Maverick, etc). You wouldn't be looking at some of these other funds who have larger ETF positions. It all just comes down to the specific strategy each fund is running & their risk tolerance.

bayas2tcnj · 6 months ago

Hi Marketfolly,

Are you just tracking the performance or do actually have any capital invested in the holdings from these funds?

Also from my understanding Alphaclone updates their databse as soon as the fillings are made. But these filings are made quaterly. Does the timing the funds acquired the stocks affect the return of your cloned porfolio, or does alphaclone assume the actual purchase date when calculating results ?

Last Alphaclone seems great for backtesting results of funds or maybe even individual stocks. But realistically can an investor that wanted to invest with a cloned portfolio, expect the same return as the clone? If yes, why there is the whole timing issue, one would buy the stock when Alphaclone is updated not when the manager bought. I guess I would have to backtest my portfolio made from my clone, at current prices, to see if there is some alpha.

Thanks!

hope you reply since this is an old post.

PS: sorry for mispellings im at work!

marketfolly · 6 months ago

Hey bayas, thanks for the comment. Yes I am both tracking these portfolios and I also have capital invested in a few strategies that I have created through Alphaclone (especially the one listed above). Their software allows for tons of possibilities in terms of clones and they have graciously allowed me to publicize this version of one of my clones to the public.

They update their database four times a year (once each quarter for each 13F filing) and then they rebalance the portfolios 5 days after the end of the filing period, to ensure that all funds have filed the latest updates. So, yes, the timing of investing would affect returns, dependent on when you invested. The best and easiest way to start using them is to invest alongside them when the portfolio changes each quarter. So, you rebalance 4 times a year and sometimes you'll have a lot of changes to make... sometimes not. It is dependent on what the funds themselves have done.

They calculate their purchase price on the 5th day after the filing period ends... so usually a week after I begin my portfolio tracking series on the blog.

And yes, as you point out, Alphaclone is a great mechanism to backtest results and see how certain funds and strategies have done over time. The ability to hedge the portfolio is also instrumental too. In brief, yes you can match the returns of the clone (minus trade commission costs with your broker). All you have to do is invest and rebalance each time there are new filings, so it is really easy.

Alphaclone shows you the Alpha generated which each clone you create.. it's one of the data metrics they calculate for you, which is really useful. And the timing issue is tricky because these filings were made for positions they held a month and a half ago. And then you also tag on the 5 day lag Alphaclone has when they purchase the shares. So, even though there is a timing issue between when the manager has bought the shares and when Alphaclone buys the shares, the performance numbers still are amazing.

I'd definitely recommend checking it out more in depth as once you play around you'll see a lot of the capabilities I was talking about. Feel free to email me if you have any questions as well: marketfolly@gmail.com.

Jay

bayas2tcnj · 6 months ago

WOW! it is amazing that even with the differences between manager purchase and alphaclone purchase dates plus the 5 day buffer there is still substantial returns to be made. Probably because a lot of the funds you chose are value investors who dont focus on timing but fundamentals which take some time to be correctly priced into the stocks.

I will check alphaclone out in a couple of months. I'm buying a house so i dont have much capital to play around with (helping the economy recover).

Dont mean to be a cheapskate here but in theory cant I build my portfolio by following your coverage. haha just an idea.

Thanks for the quick reply,

Juan

marketfolly · 6 months ago

Yes it really is amazing that the performance is still there despite the time lag. That is why it is crucial to select managers who you know have a fundamental long/short equity strategy so you can watch them build their positions over time. For instance, that's why I chose Baupost, Eton, and Shumway. Choosing say SAC or Renaissance wouldn't work because they trade around their positions too much and the time lag would screw with you there.

If you were unaware, Alphaclone actually has a free login where you can check out a few of the portfolios and clones for free without having to pay, so you should check that one out in the mean time.

And yea I've posted it up publicly with their blessing to help illustrate how great the tool is and so people can follow along with my progress.

Thanks

Jay

OG · 5 months ago

Jay,
Why wasnt Linn Energy in the Baupost top 5 as of 12-31-08? Thanks,

marketfolly · 5 months ago

I'm not sure, that is a bit odd... let me look into this deeper and I'll get back to you.

marketfolly · 5 months ago

Okay I've got the answer. Alphaclone only uses common equity positions and Baupost's stake in LINN is a unit, which is often a warrant and not an equity position. Since everyday investors cannot typically invest in warrants, its not proper to clone that position. The most accurate cloning takes place with equity positions as those are the easiest to track, to assign prices to, and to invest in alongside a fund (so you can clone their portfolio). Hopefully this makes sense and let me know if you need further clarification. The same holds true for Options positions, etc.. since there's no way for us to know the month, strike price, etc.

bayas2tcnj · 4 months ago

I wish there was a mutual fund that i can just put my money in and let you do the work Jay!

marketfolly · 4 months ago

I know, that'd be pretty easy right? They're working on getting it so you can essentially buy a streamlined portfolio where you set x amount of money up and then it will invest it automatically in the right securities. However, this is only for some basic clones and hasn't spread to customized ones. I'll obviously post up any developments as it goes along.