Profiting from Hedge Funds: Winning Strategies for the Little Guy

Chapter 14

Introduction

The evaluation of an eclectic selection of the best fund managers in the first part of this book introduced a varied number of investment styles and philosophies. The study substantiated that, no matter the game plan, the best practitioners are extremely successful over the long haul. This section gets into the nuts and bolts of the next logical step: how to construct mechanically cloned portfolios that are highly likely to outperform the market. Individual investors, even those who have absolutely no interest in analyzing businesses or actively making buy/sell/hold decisions, stand to benefit immensely from this approach, for they too can play the field with a fair chance of success.

Research has categorically established that cloning based on disclosed positions of active fund managers is a very viable strategy for individual investors:

• Massachusetts Institute of Technology Department of Economics in 2000 concluded that copycat funds have the potential to generate returns comparable to the primitive funds they are designed to mimic. This research was based on a broad sample of diversified U.S. equity mutual fund data from 1992 to 1999.1
• Erasmus University in 2010 analyzed the performance of impersonator funds and their performance characteristics twice, before and after the 2004 SEC regulation that increased the mandatory reporting frequency of mutual fund holdings from semiannually to quarterly.2 Their conclusion was that portfolio disclosure was costly ...