At Insider Monkey we usually focus on stocks in which a select group of hedge funds prefers to invest its capital, but we also notice that hedge funds similar to smaller investors don’t mind investing in ETFs, which offer more diversification. However, many large investors use options underlying shares of ETFs to hedge their portfolios. This is particularly the case with the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), where many bullish investors acquire ‘Put’ options underlying shares, with values that sometimes amass over a half of their equity portfolios. For example, George Soros‘ Soros Fund Management holds ‘Put’ options equal to $600 million worth of SPY shares, and ‘Call’ options underlying SPY shares with a value of $1.82 billion. Ken Griffin’s Citadel Advisors also disclosed $6.21 billion worth of SPY shares held in ‘Put’ options.
Following ETFs in which hedge funds invest not only can provide some investment opportunities for piggybackers, but also shows the sectors of the economy of which smart money is concentrating their attention. We consider that imitating hedge funds’ bullish moves is an easy way for retail investors to beat the market, since hedge fund managers have great skills at picking individual stocks. The weak returns of these investors in the last several years are mostly due to their short positions in a bullish environment, as well to their large size, which forces them to invest more in large and mega-cap stocks which are more efficiently priced relative to broader indices. On the other hand, imitating hedge funds’ small cap ideas can generate returns of around one percentage point above the market, as our backtests showed (read more details here). Our strategy, which is based on 15 most popular small-cap picks, has returned over 123% since August 2012, beating the S&P 500 ETF (SPY) by more than 65 percentage points.
With this in mind, let’s take a closer look at some of the ETFs in which hedge funds from our database invest. We will start with iShares MSCI Emerging Markets Index (ETF) (NYSEARCA:EEM), which, as it can be understood from its name, allows exposure to 23 emerging market economies. The index that underlies the ETF is composed of large- and mid-cap equities from the emerging markets, which represent at least 90% of its assets. Over the last 52 weeks, the iShares MSCI Emerging Markets Index (ETF) (NYSEARCA:EEM) lost more than 25%, slightly underperforming some of its peers. Moreover, this ETF is rather expensive as it sports an expense ratio of almost 0.70%. At the end of June, 34 funds from our database held around $4.21 billion worth of shares of EEM, significantly above 27 funds with $3.65 billion in shares at the end of March. Some of the investors that bet on a turnaround in the emerging markets include Kevin Michael Ulrich And Anthony Davis’ Anchorage Advisors and Soros Fund Management, both of whom initiated positions with ‘Call’ options underlying 2.50 million shares and 2.0 million shares of the ETF.
Market Vectors Gold Miners ETF (NYSEARCA:GDX) ranked on the fourth spot as 35 investors disclosed positions with an aggregate value of $580.52 million, slightly higher over the quarter. This ETF is 100% long and has assets worth $4.60 billion. It replicates the performance of the NYSE Arca Gold Miners Index and invests at least 80% of its assets in securities that are included in the index. NYSE Arca Gold Miners Index consists of public companies that are involved in the mining for gold and silver. As commodity prices have been declining, the index has lost around 24% of its value year-to-date. David Einhorn‘s Greenlight Capital owns 8.52 million shares of GDX, worth some $151.28 million.
Hedge funds from our database also like to diversify into small-cap stocks and in this situation, one of the best ETFs to invest in is iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), in which 38 investors disclosed holdings with an aggregate value of $2.51 billion, significantly higher than $1.20 billion held by 34 funds at the end of March. One of the attractive features of this ETF is a low expense ratio of only 0.20% and it allows the exposure to stocks from Russell 2000 Index, which is highly diversified across sectors. The Russell 2000 ETF declined by less than 1.50% in the last year, almost in line with the SPY. Two investors that bet against the small-cap space are Ken Griffin and Jeff Smith of Starboard Value, whose funds disclosed holding ‘Put’ options underlying 10.94 million shares and 8.60 million shares of the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) respectively. Moreover, Starboard’s holding is equal to more than 24% of its equity portfolio as of the end of June.
SPDR Gold Trust (ETF) (NYSEARCA:GLD) is another gold-related ETF, which hedge funds are bullish on, as gold represents a good insurance against market turmoil. Investing in a gold ETF offers a higher liquidity than buying the actual commodity, hence the popularity of the ETF, which was included in the equity portfolios of 53 funds from our database. During the second quarter the number of investors with long positions slightly increased from 48, but the value of their holdings surged to $5.50 billion from $3.76 billion, which shows that hedge funds are cautious regarding the market and want to protect their portfolios in case of a market drop. Among the investors that hold long positions in SPDR Gold Trust as of the end of June are John Paulson’s Paulson & Co. and First Eagle Investment Management, which own 9.23 million shares and 4.68 million shares, although both positions represent small portions of their equity portfolios. On the other hand, John W. Moon’s Moon Capital Management disclosed ownership of 324,000 shares of the ETF valued at $36.41 million in its latest 13F, which amasses more than 20% of its equity portfolio.
Finally, as expected, on the first spot is SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which was included in the equity portfolios of 96 funds from our database at the end of June, while the aggregate value of their holdings amassed $25.61 billion. This was higher than 90 investors holding $13.69 billion worth of ETF’s shares at the end of March. The ETF remained almost flat during the second quarter, but lost more than 6% year-to-date, as the S&P 500 Index slumped in the last several days amid a massive sell-off triggered by fears about the growth in China. As stated at the beginning of the article, holding options underlying shares of this ETF is a very good hedging strategy against unexpected events, regardless of the investor’s bullish or bearish sentiment. We can assume that large money managers, some of which have been mentioned earlier as holders of large positions in ‘Put’ options, have made a boatload of money if they executed their options, which could have a positive effect on their returns. On the other hand, Tiger Cub’s Kris Kristynik’s Longhorn Capital will be negatively affected as it holds 100% of its $180 million equity portfolio in shares of SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Ray Dalio’s Bridgewater Associates also disclosed a $2.15 billion position in the ETF that contains 10.47 million shares, equal to almost 20% of its 13F portfolio.
Disclosure: none
