In 1906, a British scientist named Francis Galton travelled to a regional fair. There, he came across a contest. An ox had been put on display. The simple challenge: Could any individual guess how heavy the ox was?
800 participants placed their bets. Not a single one guessed the correct weight of 1,198 pounds. But after the contest, Galton requested the ticket stubs from the organizers. Then he compiled all the guesses, and his research discovered a very interesting result: While no one individual guessed the actual number, the average of everyone’s estimates was 1,197 pounds, just 1 pound less than right answer!
The conclusion: Opinions aggregated from a large group of individuals are generally more accurate than any single expert’s opinions.
But how could this insight apply to investing? Investors have long been curious how “Wall Street’s smartest money”, Hedge Funds make their money. Top hedge funds pay their staff millions of dollars a year to identify, analyse and invest in the world’s best stocks. Top hedge funds are also famously secretive. But what if the average investors could find out exactly which stocks Wall Street’s leading hedge funds are buying?
There is a way to find out: Every hedge fund that manages more than $100 million must disclose its holdings to the SEC every quarter. Therefore, the top holdings of hedge funds become publicly available but with a maximum delay of 45 days. If you wanted to invest in the same stocks as Bill Ackman’s Pershing Square Capital Management and you know where to look, you could access Pershing Square’s largest holdings as it reports them to the SEC.
But even better, what if you could use the wisdom of crowds to invest in the top stocks of Wall Street’s smartest money?
This is exactly the purpose of the Goldman Sachs Hedge Industry VIP ETF (NYSE: GVIP). This ETF allows you to invest in hedge fund managers’ top long stock ideas.
Goldman screens all the publicly available data of fundamentally driven hedge fund managers. In doing so, it limits itself to hedge funds that hold $100 million or more in U.S.-listed stocks and 10 to 200 distinct equity positions. Goldman then further selects the 50 U.S.-listed stocks that appear most frequently in the top 10 holdings of these hedge funds. Finally, it uses this information to construct the Goldman Sachs Hedge Fund VIP Index, consisting of what Goldman calls hedge fund managers’ “Very-Important-Positions.” The index weights the 50 stocks equally and holds them until the next quarter, when the portfolio is rebalanced.
All this is available to you in the form of an ETF that charges a fraction of what top hedge funds charge. So how has this hedge fund ETF approach fared compared with the benchmark S&P 500? Since the market bottomed a year ago, the ETF has been on fire. It returned 57.5% over the past 12 months. That’s more than double the S&P 500’s return of 26.8% over the same period.
Over the past 12 months when Wall Street’s smartest money has shined compared with the broader market, this particular use of wisdom of crowds proved to be right.
Sven Franssen