Over the past decade or so, a new style of investing has proliferated: the copycat investor.
The basic idea is always the same. Watch quarterly reports from top investment gurus and their holdings at the end of each quarter. Then simply invest in the same stocks they have.
There are obvious problems with the copycat investment style. Holdings are only published with a substantial delay, and we do not know which shares an investor has bought and then resold during each quarter. We can only see holdings at the end of each quarter.
But if the investment guru is a long-term investor and holds mostly stocks and very little in the way of derivatives or private assets, the copycat strategy might work.
These copycat strategies have been put into action in the US via exchange-traded funds (ETFs) and now have a relatively long track record that, crucially, includes the bear market of 2020. To my knowledge, there three such copycat ETFs, all of which invest exclusively in US stocks and should therefore be benchmarked against the S&P 500:
- The Global X Guru Index ETF (GURU) has $74 million in assets under management (AUM) and tracks the positions of thousands of hedge fund managers.
- The AlphaClone Alternative Alpha ETF (ALFA) has $32M in AUM and tracks holdings of ~500 hedge funds.
- The Goldman Sachs Hedge Industry VIP ETF (GVIP) has $220 million in AUM and tracks the 50 stocks most frequently held by hedge fund managers.
Since the launch of the GVIP ETF in 2016, two of these ETFs have materially outperformed the S&P 500. While GURU has underperformed the index by 0.5% annually, ALFA and GVIP have outperformed the S&P 500 by 2 .6% and 2.6%. per year, respectively.
Copycat ETF performance since 2016
Not bad, but that outperformance leads to greater volatility and greater drawdowns during a crisis. The S&P 500’s biggest drop came during the height of the pandemic panic in March 2020. The index then fell 19.6%, while GVIP fell 21.4% and ALFA fell 25.1 %.
As the chart above indicates, this meant that copycat ETFs lost all of the outperformance they created between 2016 and 2020 in one month, as was the case with ALFA, or underperformed the S&P 500 thereafter having previously matched their performance, as with GURU and GVIP.
It was only in the recovery from April last year that copycat funds started to outperform.
And while the GVIP ETF has only been around since 2016, we can use the GURU and ALFA ETFs to go even further back to mid-2012 when these two funds were launched.
Copycat ETF performance since 2012
With almost 10 years of performance to look at, we can hardly conclude that these copycat funds add much value. Both GURU and ALFA have underperformed by 1.3% and 1.6% per year, respectively, and had much higher volatility. The chart above shows that copied funds did well in the 2012-2015 surge and then lost all of that outperformance and more in the 2015-2016 correction.
These dummy funds look a lot like fair-weather investments that don’t perform for an entire cycle. In fact, copying other investors misses a key ingredient for superior performance: creativity.
I will cover this ingredient in my next post.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Joachim Klement, CFA
