While there is no official minimum investment for hedge funds, very, very few accept anything less than $100,000. Many hedge funds require a minimum of $1 million, and a few demand a minimum investment of $25 million. Obviously, these minimums really eliminate everyone but the very rich from investing in hedge funds. Not only are the minimums high, but most hedge funds require lock-up periods for your investment ranging from six months to several years. Although there are ways to get your money out, despite the lockup, it can be very costly.
As you can see, hedge funds are only investments for those with a substantial tolerance for risk -- not to mention a fat bank account.
How It's Done
But it is possible for investors like you and me to mirror their performance. A new exchange-traded fund has just been launched that tries to replicate equity hedge fund performance. The ETF is the
Global X Top Guru Holdings Index ETF
GURU has just launched, so it has very limited history. However, back testing reveals the GURU ETF would have climbed roughly 30% annually during the past three years, beating the
Standard & Poor's 500's
22% average yearly gain.
The ETF invests in the single largest holdings of 68 top hedge funds, including John Paulson's Paulson & Co., Bill Ackman's Pershing Square Capital Management, David Tepper's Appaloosa Management, David Einhorn's Greenlight Capital and Daniel Loeb's Third Point.
As you can guess, there is much duplication in the holdings of the top hedge funds. Therefore, the fund consists of just 51 stocks, all equally weighted at 1.96%. Technology, financial and industrial stocks comprise nearly 55% of the fund, with holdings including
J.P. Morgan Chase
American International Group
and Sallie Mae owner SLM Corp.
GURU charges a fee of 0.75% of assets to cover expenses. It's important to note that most hedge funds charge a 2% management fee and 20% of profits on an annual basis.
So what secretive method does GURU use to determine what are the top holdings of hedge funds? Well, it's really no secret at all.