We’ll be rebalancing our AlphaClone Hedge Fund Long/Short Index this week based on the most recent batch of 13F filings. Like our AlphaClone Select strategy in managed accounts, the index uses our Clone Score methodology to make manager selections semi-annually. The index is tracked by a recently introduced exchange traded fund and has returned 14.3% since the ETF’s introduction on 5/31/12 vs. 8.9% for the S&P 500TR (as of 11/23/2012). The index’s 5 year total return is 70% vs 9% for the S&P 500TR.
Last quarter, we saw the index’s sector allocations shift away from financials and toward construction, business services, and consumer discretionary stocks. This quarter we’re seeing continued bullishness on the construction sector, a slight pull back on consumer discretionary stocks and significant reversals (underweight to overweight) on energy and basic materials stocks.
Construction sector: the index has a 6.6% allocation to this sector, which is 5.9 percentage points overweight the S&P 500 index. The index has been progressively more bullish on construction stocks over the past several quarters indicating increasing confidence amongst hedge funds that the US housing market has made a turn.
Energy and Basic Materials sectors: after shying away from these sectors during the first half of the year, hedge funds are once again overweight energy and basic material names by 3.1 and 2.3 percentage points respectively. The shift seems to be playing the odds that 2013 will see a combination of an increase in price inflation together with a slow but positive recovery in global economies and thus increases in demand for energy and basic materials products both here and abroad.
Financials: after an aggressive move away from financials during Q2, the index has increased its allocation to financial stocks this quarter to be roughly in line with the S&P 500 (15.8%). It’s really anyone’s guess here but we’ve seen hedge funds generally reduce their exposure here over the several quarters. There has been plenty to worry about in the sector; from the London whale to LIBOR fixing to the US economy diving off the fiscal cliff and increasing taxes. On the other side however have been relatively attractive valuations (current sector P/E of 13), a recently oversold market, and the risks of getting left behind if the sector (and the economy) are able to sail through the current headwinds unscathed.