By Nicholas A. Vardy, CFA
Over the past six months, ALFA has risen 9.84% vs. 4.05% for the S&P 500. So far in 2015, ALFA has really caught fire, surging 4.89% vs. the S&P's gain of less than 1%. And it has done so charging (for hedge funds) a relatively modest management fee of 0.95% annually.
So what's the secret of ALFA's success?
A quick look at the top three holdings in ALFA reveals why this fund is outperforming the S&P 500 over the past six months.
1) Apple Inc.
The recent surge in Apple /zigman2/quotes/202934861/composite AAPL +3.19% shares makes having this newly ordained Dow Jones Industrial Average component as ALFA's top holding (4.06%) a boost to the ETF's performance.
Apple's shares are up 22.42% in the past six months. And owning this stalwart personal technology giant has been one of the premier investments of choice for both hedge funds and individual investors alike.
2) Biogen Idec
Biotech star Biogen Idec /zigman2/quotes/201531540/composite BIIB +2.47% is riding the huge bullish wave in the biotech sector and has been doing so for some time. Through the past six months, this maker of therapies for the treatment of neurodegenerative diseases, hemophilia and autoimmune disorders has seen its share price vault 26.05%. BIIB shares are the second-largest holding in ALFA at 3.21%.
So here, again, you see ALFA betting on a winning horse.
3) Baidu Inc. (BIDU)
Sadly, ALFA doesn't get them all right.
The ETF's third-largest holding, at 3.11%, is Chinese Internet service provider Baidu. That stock has struggled over the past six months and is down 6.68% on fears of a slowdown in the Chinese economy.
Despite its recent struggles, it's hard to fault the selection of BIDU in a hedge fund replicator ETF.
After all, BIDU has delivered an incredible 257% gain over the past five years and is a bellwether stock for a play on the massive growth of the Chinese Internet technology segment.
The bottom line?
Investing in the publicly disclosed holdings of top hedge funds does appear to allow hedge fund replicator ETFs to generate superior returns.
And a big part of that edge compared to hedge funds is their much lower fee structure.
Disclosure: Vardy owns ALFA and GURU.