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New ETF tracks hedge fund gurus

Date: Tuesday, June 26, 2012
Author: Harriet Agnew, Financial News

Global X Funds, a New York-based provider of exchange-traded funds, has devised a new ETF that gives investors exposure to the long ideas of renowned hedge fund managers such as John Paulson and David Einhorn.

The Global X Top Guru Holdings Index ETF, which began trading on Tuesday, is designed to be a cheap way for investors to access the investment ideas of the largest and most sophisticated hedge fund managers, such as John Paulson's Paulson and Co., David Einhorn's Greenlight Capital, Bill Ackmann's Pershing Square Capital Management and Dan Loeb's Third Point.

Bruno del Ama, chief executive officer of Global X Funds, told Financial News that the firm applies several filters to put together its index.

Its first port of call is Morningstar's database of hedge funds, where it selects those funds that publish quarterly 13-F filings with the US Securities and Exchange Commission. These are funds that run more than $100m in US equity investments.

Of the funds that remain, Global X Funds looks for those that have a minimum of $500m reported in US equities and then filters out funds that have more than 50% portfolio turnover. Of these, only those who have at least a 5% position in US equities are counted.

Del Ama said: "You end up with 68 hedge funds that are meaningful in size, have low portfolio turnover and high conviction."

Global X Funds picks the top holdings, removing duplicates, ending up with a portfolio of 51 equity positions, which are given equal weighting in the index.

Hedge funds in the US are not required to report their short positions with the SEC. Del Ama said: "While we can track their long positions, we can't capture their shorts and so can't benefit from their view on companies that they think will do badly."

According to index provider Structured Solutions, which created the Top Guru Holdings Index specifically for the new ETF, a back-tested portfolio would have achieved annual returns of around 30% during the past three years, beating the S&P 500's (SPX) 22% average yearly gain.

The ETF is targeting would-be investors in US equities who want to outperform the S&P500 without paying the high fees and large investment minimums levied by hedge funds.

Del Ama said: "This is a product that we think will generate alpha consistently on a low-cost basis, with daily liquidity and full position transparency."

The ETF began, which has an expense ratio of 0.75%, started trading with $5m. Global X Funds manages $1.32bn.

--Write to harriet.agnew@dowjones.com