AlphaClone to Launch 4 New Hedge Fund Replication ETFs

AlphaClone to Launch 4 New Hedge Fund Replication ETFsInvesting with some of the best hedge fund managers is about to get a bit easier, and a bit more focused. AlphaClone has filed paperwork with the SEC announcing its intent to launch four new smart-beta, hedge fund replication ETFs. Each of the ETFs will specialize on a specific area of the global equities market: U.S. small caps, world ex-U.S., activist-targeted stocks, and value. The new ETFs, which could debut as early as October 7, 2015, will include:

  • AlphaClone Small Cap ETF
  • AlphaClone International ETF
  • AlphaClone Activist ETF
  • AlphaClone Value ETF

All four ETFs will be passively managed and will attempt to track smart-beta indexes targeting their particular areas of exposure, and each index is based on a “proprietary hedge fund position replication methodology” developed by Coefficient Capital, the fund’s advisor.

Hedged Small Cap and International Exposure

The AlphaClone Small Cap ETF will seek to track the performance of the AlphaClone Small Cap Downside Hedged Index, an index of 150 to 250 small-cap U.S. stocks, while the AlphaClone International ETF aims to track the performance of the AlphaClone International Downside Hedged Index, which consists of 40-50 U.S.-listed ADRs.

Both of the underlying indices for these two funds utilize a moving average to adjust the amount of net stock exposure in the funds. For example, the prospectus for the Small Cap fund lists the index methodology as follows (the International fund’s index methodology is similar):

The Index can oscillate between being  long only or market neutral. When the AlphaClone Small Cap Index, a long-only variant of the Index, closes below its 200 day simple moving average (“200 day SMA”) at the most recent month-end, the Index will become market neutral by adding a short position in a security that tracks the Russell 2000 Index in an amount equal to the market value of 100% of the Index’s long positions. The Index will return to its long-only posture when the AlphaClone Small Cap Index closes above its 200 day SMA at a subsequent month-end.

Activist and Value Focus

The AlphaClone Activist ETF and the AlphaClone Value ETF round out the quartet of new funds, and they will seek to track the AlphaClone Activist and Value indexes, respectively. The Activist Index consists of between 40 and 100 U.S. stocks with activist interest, based on 13D filings; and the Value Index also consists of between 40 and 100 U.S. stocks, but with a factor-based value tilt.

The new ETFs will join AlphaClone’s existing exchange-traded product, the AlphaClone Alternative Alpha ETF (ALFA). It launched on May 31, 2012, and returned a stunning 14.88% for the most recent one-year ending June 30. A $10,000 initial investment upon the ETF’s launch would have turned into more than $18,000 by June 30, 2015, according to Morningstar, which gives the fund a 5-star rating.

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