FAQ - Clones and Cloning

What’s a clone?

A clone is simply a new portfolio of stocks created based on the stock ideas of one or more fund manager(s). We backtest all of our clones assuming that investment in those stock ideas is made at the time they are made public – thus giving our users the confidence to apply those stock ideas for themselves. This process is called “cloning”.

Why is cloning valuable?

Numerous academic studies have shown the potential for cloning the stock ideas from top money managers to consistently outperform the overall market by a significant amount. Cloning can also be a powerful way to validate an investor’s own stock picks or find new ones.

How do I know which clones perform best?

Simple. Our Leaderboard allows you to instantly rank the thousands of available clones across any one of several time horizons and using one of several performance metrics including: total return, annualized return, sharpe ratio, annualized volatility and alpha. You can also rank the performance of only clones you save/create in your Dashboard view. Clone performance is updated daily.

What SEC filing do you use to derive stock holdings?

We automatically aggregate the public filings of over 230 top institutional investment managers and hedge funds. The form we aggregate is the 13F-HR form and managers must file quarterly no later than 45 days after quarter end.

How do you generate clones?

Cloning is fully automated. For each clone:

• Step 1: We generate the current and historical quarterly holdings based on the desired cloning strategy (see- “What’s a cloning strategy”? below).
• Step 2: We rebalance clones at closing prices 50 calendar days after each quarter end
• Step 3: We update clone performance daily and update clone holdings quarterly as we receive new filings.

When do you rebalance your clones?

We rebalance or add/delete holdings quarterly, 5 business days after the expiration of the SEC’s deadline to file form 13F-HR (45 calendar days after each quarter end).

How do you hedge clones?

AlphaClone’s clone portfolio can be hedged against downside market risk by “shorting” the S&P 500 index. AlphaClone performs hedges on its clones assuming that 100% of the clone’s invested principle is always in the clone’s long positions. Here is an example:

• A $10,000 portfolio, hedged 25%:
  - $10,000 long
  - $2,500 short S&P 500
  

• A $10,000 portfolio, hedged 50%:
  - $10,000 long
  - $5000 short S&P 500
  

• A $10,000 portfolio, hedged 75%:
  - $10,000 long
  - $7,500 short S&P 500
  

• A $10,000 portfolio, hedged 100%:
  - $10,000 long
  - $10,000 short S&P 500

Users can select from more than one hedging level. Hedging is meant for illustrative purposes only and results will vary depending on choice of brokerage and products used (ETFs, futures, options). Hedged clones do not adjust for short rebates.

What’s a clone strategy?

You can choose to follow different stock idea attributes from one or a group of managers. For example, following Warren Buffett’s ten largest holdings each quarter is different than following Warren Buffett’s 10 largest new holdings each quarter. AlphaClone currently allows members to clone Top Holdings (largest positions), Best Ideas (largest new positions) and Popularity (largest number of holders – for groups only). Each cloning strategy has its own set of buy and sell rules (see—“Glossary”).

How do you choose the funds in your database?

We generally chose the largest institutional funds and hedge funds as measured by the total market value disclosed on their filings. The funds in our database represent roughly 70% or more of the total market value disclosed by all funds that file 13F-HR forms. We will tend to avoid funds that are owned/operated by prime brokers and those with large ETF businesses.

What happens if a fund no longer files or goes out of business?

While clones for inactive managers will no longer be accessible going forward, the historical effect the manager had on clones it impacted remains unchanged and is not purged – this helps us avoid survivorship bias. An example of this is when a manager is included in a fund group from which clones are then generated and subsequently the manager goes out of business.

My clone shows no holdings in one or more quarters. Why is that?

There are two basic reasons this may happen:

• The clone strategy you are running did not find any matching holdings for one or more quarters. For example, you are running a popularity strategy for a fund group that is made up of relatively few funds (less than 10). To qualify as popular a security must be held by at least two funds in the same period. If there are no holdings that meet this definition, the clone will have no holdings in that quarter.
• The clone strategy does find matching holdings but the company associated with the security goes inactive prior to the rebalance date. For example, a fund discloses that their top three holdings are company A, B, and C as of 12/31/2008. All clones are rebalanced on 2/19/2009. Between 12/31/2008 and 2/19/2009 all three companies are acquired, merged or delisted such that their stock is not tradable on the rebalance date. If you were running the Top 3 Holding clone strategy for this fund there would be no holdings to display.

What about survivorship bias?

AlphaClone avoids survivorship bias in two ways. Firstly, by including both currently active and inactive securities in our back-test results, we avoid survivorship bias from companies that have gone out of business or merged. Second, we avoid survivorship bias with respect to funds that go out of business by preserving the historical effects that fund had on clone performance (see- “What happens if a fund no longer files or goes out of business?”)

How can I customize a clone?

Members can customize clones across several attributes including strategy, number of holdings, whether the clone is hedged or long only and what rebalancing method to use (equal weighted or normalized to match the manager). Members can also generate clones based on a combination of up to 30 funds (a fund group) that they select. All clones (both custom and pre-generated) can be customized.

Do you provide insight into short positions?

No. manager’s who file 13F-HR currently are not required to disclose their short positions.

What are the limitations of cloning?

We have gone to great lengths to ensure the quality and timeliness of our data and simulations. However, our clones are restricted to common equity investments that trade on US markets, are publicly disclosed and for which we have been able to obtain return data.

Is AlphaClone affiliated with the investment companies in its database?

AlphaClone is in no way affiliated with the investment funds in our database and the service does not attempt to replicate a manager’s specific investment approach or strategy.