How to copy a hedge fund billionaire’s investment plan

How to copy a hedge fund billionaire’s investment plan

By Tim Fernholz @timfernholz 7 hours ago

I realized the pop culture phenomenon that is the activist investor had taken a new turn when a friend showed me an iPhone app at a party. iBillionaire lets you track the investments of “billionaire investors” whose names you know (Carl Icahn, David Loeb, David Tepper and David Einhorn among them) and compare them to your own feeble portfolio.Now, the people behind the app have produced a 30-stock equity index, compiled by the New  York Stock Exchange, which went live today. It purports to offer a snapshot of where the most successful investors are putting their money. The company hopes to follow up with an iBillionaire exchange-traded fund, which would allow regular investors to buy shares in a portfolio that tracks the index, effectively putting their money where the billionaires mouths’ are in an attempt to ape their earnings.

“I’m completely against the efficient markets hypothesis,” Raul Moreno, one of the company’s founders, says of the idea that you can’t beat the market. “I think Warren Buffet and all these billionaires are proof that the hypothesis is just that, right? A hypothesis is a theory.”

It’s unclear how coherent iBillionaire’s strategy is, since it is based on investors with very different (and often contradictory) investment approaches. But given the amount of news about activist investors’ demands for board changes, new CEOs and stock buy-backs, Moreno and his co-founder Alejandro Estrada are counting on publicity to attract people to their app, index and, if they succeed, investment fund.

The index relies on regulatory filings—the so-called 13-F form—that investment managers are required to submit, disclosing which stocks they hold. However, iBillionaire hasn’t said publicly which 10 of the 30 billionaires it tracks underpin the index, or how it decided on them. The billionaires must file their disclosures within 45 days of the end of each quarter, which adds a significant delay for anyone trying to follow someone else’s strategy. Moreno says he picked the investors that tend to hold onto their equity positions consistently.

Skeptical, I called a hedge fund analyst to get his take on the project. He too warned that any fund that trades frequently, like Steven Cohen’s soon-to-close SAC Capital, wouldn’t see its strategies reflected in this method, and that 13-F disclosures don’t include all kinds of investments. Many of the investors iBillionaire tracks don’t have to let on about substantial holdings of debt, short positions, or private equity that generate the returns advertised by their funds.

But “clone funds” are nothing new, and several different ETFs exist that use similar, albeit more sophisticated, methods to copy the most successful hedge fund managers. Here are three, compared to the S&P 500:

​Indeed, iBillionaire says its own index would have outperformed the S&P 500 by 9.23 percentage points in the last year.

But there’s one thing to keep in mind: Since the financial crisis, we’ve been experiencing an on-going bull market in stocks, with the S&P 500 returning some 116% since November 2008 (regularly beating the averaged return of top hedge funds). A weighted average of the 30 most-purchased stocks by the most successful investors over that time period would show some pretty good past returns. What that means for future performance, however, is anyone’s guess.