1.
5 MYTHS ABOUT
CLONING HEDGE FUNDS
Future of Finance Webinar Series
Presenter: Maz Jadallah, Founder/CEO, AlphaClone
Moderator: Zack Miller, Author, Tradestreaming.com
Date: May 9th @ 4pm EST, 1pm PST

2.
important disclosures
Investing in fnancial markets involves risk, including the risk of principal loss. Information in this presentation is in no
way intended as investment advice and should not be interpreted as such.
Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance
results are provided for purposes of illustrating historical performance had a core strategy had been available during
the relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makes
no representation that any core strategy will achieve performance similar to any backtested performance results.
Actual results could difer materially from backtested performance and future results could difer materially from
backtested performance. Past performance is no indication or guarantee of future results.
The information provided herein comes from what AlphaClone believes to be reliable sources. AlphaClone, however,
makes no representations as to its reliability or accuracy, and you should undertake independent analysis to ensure
the accuracy of the information.
© 2010, AlphaClone LLC, All Rights Reserved. The AlphaClone logo is a service mark of AlphaClone LLC.

3.
intro
Zack Miller, Author, Tradestreaming.com Maz Jadallah, Founder/CEO, AlphaClone

4.
clone?
Quant investment
strategy that derives
buy/sell decisions from
public disclosure filings

5.
clone?
ↂ rules based
ↂ disclosure based
ↂ automated
ↂ repeatable

6.
Myth #1
45 day delay in filing renders disclosures useless

7.
1/3 Average
On average, 1 in 3 clone portfolios
outperformed the S&P500 by 10
percentage points or more
(2000 to 2010)
Source: AlphaClone

8.
clone vs. fund
2010 Fund Clone
(net) (gross: long)
Greenlight Capital 12.5% 21.3%
Pershing Square 29.7% 25.9%
Paulson & Co. 24% 19.4%
Third Point 34% 25.8%
Passport 18.3% 25.9%
Perry Capital 14.6% 28.4%
Source: AlphaClone, “Clone vs Fund 2010”

9.
Myth #2
Many hedge fund trades are “crowded”

10.
Implication
Little guy gets hurt when funds exit

11.
35% % Overlap
20 most popular hedge fund
30% AAPL holdings for Q4 2010*
25% C
20% GOOG
15% JPM
BAC
GENZ
10% GM POT
WFC BIDU
CCI WMB
5%
0% * Based on 178 hedge funds tracked by AlphaClone
0 5 10 15 20 25
Source: AlphaClone

12.
% Overlap
3 most popular hedge fund
holdings - Q3/99 to Q3/10
Most Crowded 2nd Most 3rd Most
35%
30%
25%
20%
15%
10%
5%
Q1 00
Q1 01
Q1 02
Q1 03
Q1 04
Q1 05
Q1 06
Q1 07
Q1 08
Q1 09
Q1 10
Source: AlphaClone

13.
Myth #3
Outperformance is due to luck

14.
french/fama study
“Luck vs. Skill In Mutual
Fund Performance”
2% 2% Luck
% of active mutual funds
Skill
% of active mutual funds
expected to outperform if that actually
selected randomly outperformed
Source: Fama/French Forum, “Luck vs. Skill in Mutual Fund Performance”

15.
clone universe - top 20 holdings
“Luck vs. Skill”
2% 24% Luck
% of active mutual
Skill
% of clones that outperformed
funds expected to by 2+ standard deviations
outperform if
selected randomly

16.
Talent matters

17.
Myth #4
All my alpha is in my “shorts”

18.
clone vs. fund
2010 Fund Clone
(net) (gross: long)
Greenlight Capital 12.5% 21.3%
Pershing Square 29.7% 25.9%
Paulson & Co. 24% 19.4%
Third Point 34% 25.8%
Passport 18.3% 25.9%
Perry Capital 14.6% 28.4%
Source: AlphaClone, “Clone vs Fund 2010”

19.
clone vs. fund (cont.)
2010 Fund Clone
(net) (gross: long)
Millennium Mgmt 13.3% 15.7%
SAC Capital 15% 20.3%
Tudor Capital 7.5% 10.8%
Jana Partners 8.4% 13.7%
Och-Ziff 8.4% 9.2%
Bridgewater 38% 24.9%
Source: AlphaClone, “Clone vs Fund 2010”

20.
Myth #5
Hedge funds have very short holding periods

21.
1 Year
Average hedge
fund holding
period
Source: AlphaClone; Goldman Sachs

22.
New Buys Rank +3 Mos. +12 Mos.
Appaloosa MS 1 - -
New buy retention XLE 3 - -
Q4 2008 (crisis)
GT 4 4 13
XL 5 6 18
S 7 - -
ODP 13 13 27
OMX 16 15 29
BC 18 8 14
RAD 25 10 21
WLT 31 - -
Retention 6/10 6/10
Source: AlphaClone

23.
New Buys Rank +3 Mos. +12 Mos.
Appaloosa WFC 3 2 2
New buy retention AMR 9 18 29
Q4 2009
UAL 10 14 17
DAL 11 19 38
WSH 12 15 41
RBS 17 20 31
LCC 20 26 32
NAV 24 16 35
HPT 26 - -
COF 30 37 28
Retention 9/10 9/10
Source: AlphaClone

24.
5 cloning rules
ↂ bottoms-up vs macro
ↂ backtest: broad attribution
ↂ fof mindset
ↂ protect downside
ↂ automate and stick with it

25.
questions?