Profiting from Hedge Funds: Winning Strategies for the Little Guy

Chapter 18

Alternate Models

Alternate models serve to address some of the limitations encountered while cloning a money manager’s portfolio based on 13Fs. The ten-five-two (10–5–2) allocation model (introduced in the previous chapter) is a very viable option when attempting to closely clone manager portfolios. But, if the source portfolio does not fit the allocation assumptions inherent in the model, the resulting portfolio performance will show divergence from the source portfolio. Bill Ackman’s portfolio implementation model in the last chapter demonstrated this drawback. An alternate model whose allocations match the source portfolio positions and eliminates the noise introduced by very small positions can fix this drawback. The first model in this section presents such a portfolio, using Bill Ackman’s 13F positions as the source.

The 13F based models are suitable only for the domestic-equity portion of an overall asset allocation plan as those reports show only such positions. This chapter goes beyond 13Fs to explore models suitable for use in an overall asset allocation setting. Some of the renowned managers have recommended asset classes and distributions for individual investors. Model portfolios that use the suggested allocations can be constructed using very liquid exchange traded funds (ETF) and certain other index mutual funds. Reasonably priced, decidedly liquid, ETF options and/or index mutual funds are almost always available for this purpose. Such model portfolios ...