Key Points:
- Copycat investing involves mimicking the investment strategies of prominent gurus.
- Copycat strategies can be implemented through exchange-traded funds (ETFs).
- While some copycat ETFs have outperformed the S&P 500, they also come with higher volatility and drawdowns.
- Longer-term performance data shows that copycat funds have generally underperformed and experienced higher volatility.
- Copycat investments may lack the creativity needed for consistent outperformance.
A new trend in investing has emerged over the past decade: copycat investing, where investors replicate the holdings of prominent investment gurus. The strategy involves analyzing the quarterly reports of these gurus and investing in the same stocks they hold. However, there are several challenges with this approach. Holdings are disclosed with a time lag, and it is unclear which stocks have been bought and sold within each quarter. The strategy may still work if the guru is a long-term investor and primarily holds stocks rather than derivatives or private assets.
In the United States, copycat strategies have been implemented through exchange-traded funds (ETFs) that exclusively invest in US stocks and can be compared to the S&P 500 index. Three such copycat ETFs are currently available:
- The Global X Guru Index ETF (GURU) tracks the positions of thousands of hedge fund managers and has $74 million in assets under management (AUM).
- The AlphaClone Alternative Alpha ETF (ALFA) tracks the holdings of approximately 500 hedge funds and has $32 million in AUM.
- The Goldman Sachs Hedge Industry VIP ETF (GVIP) tracks the 50 stocks held most frequently by hedge fund managers and has $220 million in AUM.
Since the launch of the GVIP ETF in 2016, ALFA and GVIP have outperformed the S&P 500, while GURU has slightly underperformed. However, it is important to note that these copycat ETFs have also exhibited higher volatility and drawdowns during market crises. For example, during the height of the pandemic panic in March 2020, the S&P 500 index fell by 19.6%, while GVIP dropped 21.4%, and ALFA experienced a significant drawdown of 25.1%. These copycat ETFs only started to outperform during the recovery since April 2020.
Looking at the longer-term performance since 2012, both GURU and ALFA have underperformed the S&P 500, with annual underperformance of 1.3% and 1.6%, respectively. Additionally, these copycat funds have exhibited higher volatility. While they performed well during the upswing from 2012 to 2015, they lost all of their outperformance and more during the 2015–2016 correction.
Overall, the evidence suggests that copycat funds do not consistently add value over an entire market cycle. Copying other investors’ strategies may miss the key ingredient for sustained outperformance: creativity. In the next post, the importance of creativity in investing will be explored in more detail.
Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect the views of CFA Institute or the author’s employer.
