Alpha cloning describes a family of strategies which aim to replicate the holdings of successful stock pickers.
As detailed in our science section, research shows that most managers underperform their benchmarks based on their full portfolios, but evaluated only on their top investments, they actually outperform.
Our cloning strategy aims to identify only the high conviction holdings of managers with a high stock-selection skill factor. Our dataset, which tracks investment managers and their top holdings, allows us to evaluate and score each managers based on their stock picking skill.
It turns out, many managers are great stock pickers, but they are hindered by the several factors we like to call portfolio drag.
The portfolio drag consists of several factors which we aim to peel away.
Asset bloat – Most successful managers attract a lot of money, forcing them to “park” money in liquid, beta one equities. We use an index type investment methodology which filters out beta type positions which usually serve the purpose of “parking” money. Accordingly, we would only take a position in a mega-cap if it is truly a high conviction position of the manager.
Benchmark hugging – Most managers tend to keep a close eye on their benchmark instead of only focusing on the stocks they truly believe in. We have a selection process of stocks which pays no regards to benchmarks. Moreover we are equal weighted while the benchmarks are market capitalization weighted.
Over-diversificaton – Most managers are forced to hold >30 stocks in their portfolio although they can truly only have a high conviction in a few core positions. We only replicate the high conviction holdings of the managers.
Fees – Most funds have an expensive fee structure which creates an obvious drag on the performance. We aim to have a low cost structure. Not only do we offer a low management fee, we aim to keep trading costs (turnover) and other costs as low as possible.