Hedge Fund Stocks: Buy What the Big Guys Are Buying

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some hedge-fund stocks (i.e., stocks favored by hedge fund managers) to your portfolio but don't have the time or expertise to hand-pick a few, the AlphaClone Alternative Alpha ETF (NYSEMKT: ALFA  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on hedge-fund-favored stocks, sports an expense ratio -- an annual fee -- of 0.95%. The fund is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF based on stocks favored by high-ranking hedge funds has performed well, beating the S&P 500 handily over the past year. It's still young, though, having been started in 2012. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why hedge fund stocks?
Seeking out stocks that hedge funds favor isn't necessarily a route to profit, as plenty of hedge funds don't perform well (in part due to hefty fees). But this ETF focused on hedge fund stocks aims to outperform by focusing on stocks held by funds that rank highly in its listings.

More than a handful of hedge fund stocks had strong performances over the past year. Memory giant Micron Technology (NASDAQ: MU  ) soared roughly 200%, and with its acquisition of Japanese company Elpida, it's now the world's second-largest DRAM maker. Its scale now gives it pricing power, and Elpida enhances its relationship with Apple, too. Bears haven't liked recent net losses and shrinking margins, and they want to see solid results from its solid-state drive-related operations. The company's recently reported fourth quarter was strong, but analysts at Wells Fargo downgraded the stock on valuation concerns, even while upping their projections for Micron.

Pharmacyclics (NASDAQ: PCYC  ) surged 93%, with investors optimistic about its New Drug Application for leukemia-treating ibrutinib, which is due to get a decision from the FDA in February. (The drug also tackles a form of non-Hodgkins lymphoma.) Some estimate that the drug could become one of the top-selling drugs of all time -- though that's still a guess at this point. There's a lot of potential in Pharmacyclics, and it could keep climbing higher -- but there's risk, too, as its key drug is not yet approved and selling.

Responsys (NASDAQ: MKTG  ) gained 72%, offering software that focuses on relationship-based marketing, among other things. Bulls see growing corporate budgets for targeted marketing, and they liked Responsys' second-quarter revenue growth of 25% and the fact that unlike some rivals, it's actually profitable. Its client list is growing, with management noting, "In the second quarter, we signed many new North American clients, including iconic fashion brand J. Crew; jewelry and watchmaker, Swiss Watch; and next-generation event technology website, Eventbrite."

Other companies didn't do quite so well over the last year but could see their fortunes change in years to come. Sears Holding (NASDAQ: SHLD  ) , encompassing both Sears and Kmart stores, shed 9% over the past year. It's worth noting that its recent price near $54 per share is well above a low in the $30s earlier this year. What's the long-beleaguered Sears doing right? Well, it's seeing success in online retailing, for one thing. Its real-estate holdings are quite valuable, too, and Sears is moving to repurpose some underutilized properties. Debt is a big worry for bears, with Sears recently borrowing $1 billion in order to address older debt.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies, such as hedge-fund stocks, and make investing in them -- and profiting from them -- that much easier.

Other ETFs can be even more exciting (and profitable!)
Looking for more compelling ETFs? Check out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.


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