Funds / ETFs, Stocks

Hedge Fund Like ETF’s Long-term Underperform The S&P 500 Anyway – Hefty Fees Of $ALFA & $GURU Are Not Justified

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By ETFalpha

Most mutual funds underperform their benchmarks and this statement is common knowledge nowadays.  According to different research sources the percentage of the funds losing the market battle is somewhere between 80 and 90 percent. This only proves how challenging it’s to extract the remaining maximum 20% of star asset managers. Only those who have outstanding fund research process are capable to find the true diamonds.

Having said above, statistically it makes sense to have considerable exposure to index tracking funds. That way you at least increase your chances to stay in line with your reference benchmark. The deal looks remarkably good as index tracking funds leave you with peace in mind that you won’t be lagging the market and that additionally comes at a lower cost, as ETF’s charge a lot less that mutual funds.

As passive investments started gaining momentum over the years, greedy investors started looking at the news ways how they could allocate their money. Staying in line with the benchmark was simply not enough. Investors were demanding something more, the investment Holy Grail which would start self-making money for them in order to stay ahead of the crowd.

Yesterday, 28th March 2016, we published an insight dedicated to the AlphaClone Alternative Alpha ETF (AMEX: $ALFA) which completely loses its momentum when the S&P 500 Index goes trendless.

The $ALFA strategy represents a hedge fund like approach with embedded downside protection mechanism which unfortunately fails when markets lose direction.

Investors can also access one more alternative ETF managed by Global X Funds and the name of the investment strategy is the GURU Index ETF (AMEX: $GURU).

The Global X Guru™ Index ETF (GURU) seeks to generate alpha over the broad market by investing in highest conviction ideas from a select pool of hedge funds.

According to Global X:

1. GURU allows everyday investors to access the high conviction investments of some of the largest, most sophisticated hedge funds in the world.

2. By investing alongside hedge funds, GURU seeks to benefit from their top tier research and knowledge to outperform US equity benchmarks such as the S&P 500.

3. Traditionally, investing with a hedge fund requires paying an ongoing 2% management fee and 20% of profits. GURU has an expense ratio of 0.75%, potentially allowing for greater cost efficiency, while providing access to hedge fund ideas.

We agree with the first point. Indeed, the GURU ETF offers a unique opportunity for investors to access investment ideas utilized by the hedge fund world. Unfortunately points two and three did not convince us. Why? It appears long-term the GURU strategy heavily underperforms the S&P 500 Index. Also we don’t necessarily agree that nowadays hedge funds still charge in line with the 2/20 fee structure. We would say it’s closer to 1.5/15. Only best of the best can afford to market their strategies with the traditional 2/20 fee setup.

As the GURU ETF underperforms the S&P 500 Index in a long run, the arguments two and three fail and the 0.75% total expense ratio is simply not justified. We would prefer to hold the $SPY ETF which tracks the S&P 500 Index and charges only 0.09% which is roughly 8 times less!

Here is the proof. We have included both the $ALFA and $GURU ETFs vs. the $SPY ETF in one chart. You can easily spot the huge underpeformance since the two hedge fund like strategies were launched in May 2012.


We believe the chart is self-explanatory and does not require any further commentary from us.


We are only wondering who are the investors who allocated the combined $220 million into the $ALFA and $GURU ETF’s and who are willing to pay 11 and 8 times higher costs of the huge underperformance?

Although the $ALFA and $GURU don’t look like exciting investment options, let’s hope the two strategies will start shining in the future and investors will get true value for the price they pay.

We value any feedback from our followers and readers. Please feel free to leave your observations below within the comments section or via our Twitter account: @ETFalpha.

Important Information Related to this Article

Please familiarize yourself with our DISCLAIMERS every time you engage the site: they’re updated constantly without notice. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. ETFalpha did not own any shares of the mentioned ETFs at the moment of writing this article.


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