Bloomberg Analyst Discusses GURU Hedge Fund’s Potential

Investor fascination with hedge funds has been on full display for the past two weeks as managers filed their quarterly holding reports, known as 13Fs. Everyone wants to know what John Paulson or David Einhorn or David Tepper is loading up on and what they’re getting rid of. And yes, there’s an exchange-traded fund to feed that fascination. It’s up 52 percent since its inception less than a year ago — 18 percent more than the S&P 500 Index.

Rich Returns From a Poor Man’s Hedge Fund

The Global X Top Guru Holdings Index ETF (GURU) sounds a bit gimmicky, but its inner workings are more sophisticated than its name. GURU’s methodology is to scour 13F filings and buy the biggest stock holding from each hedge fund. Filters are put in place to eliminate funds that have high turnover rates — those that do a lot of rapid-fire buying and selling — and the ETF considers only hedge funds with concentrated top holdings. In other words, it screens for stocks that hedge funds are committed to, which makes it a sort of greatest hits of hedge fund stock picks.

The outperformance of GURU, which has 80 percent of its assets in U.S. stocks, over the S&P 500 is partly due to the fact that it is an equal-weighted portfolio. That means that smaller juggernaut stocks like Pandora (P) and GameStop Corporation (GME) are given roughly a 2 percent weighting just like giants such as Microsoft (MSFT) and AIG (AIG). By contrast, market-cap-weighted ETFs tend to drown out small stocks’ gains and get hit harder by overvalued larger stocks coming back down to earth.

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