How to trade like the world's biggest hedge fund

Kevin Chupka
·Executive Producer/Writer

The rise of the ETF (it makes up 40% of exchange traded volume in the U.S.) has made it easier for the average investor to invest in large baskets of stocks whether by sector, country or any number of other groupings.

More and more, they’re being used by some of the biggest hedge funds as well.

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Tom Lydon of ETFTrends.com points out that “through 13F reporting on a quarterly basis, hedge funds have to disclose what their big holdings are.” That allows the average investor to peer into the decisions being made by those running “smart money.”

These big hedge fund managers are drawn to ETFs, Lydon says, because “the liquidity is fantastic. You can go in with... tens of millions - in some cases billions - of dollars into ETFs and spreads are very, very tight,” which makes the funds efficient for investors.

Ray Dalio uses ETFs in his hedge fund just like the average Joe does. Here's how to use 13F statements to trade like him...if you want to
Ray Dalio uses ETFs in his hedge fund just like the average Joe does. Here's how to use 13F statements to trade like him...if you want to

Case in point: Ray Dalio, chief of the world’s largest hedge fund, Bridgewater Associates. The firm's last two 13F filings reveal a move away from U.S. equities via the SPY ETF (from 28% of its holdings to 26.5%) and towards the emerging markets via a bigger investment in the EEM ETF (from 24.48% to 25.9%).

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“That’s maybe a good idea,” Lydon says, “as the bull market here in the U.S. might be a little bit long in the tooth. Emerging markets have been somewhat unloved over the past couple of years and valuations seem to be... very much in line and these emerging market countries have some balance sheets that look a heck of a lot more healthy than ours in the U.S.”

Still, it’s worth taking these moves with a grain of salt. Hedge funds in general have not had a particularly strong year. According to Bloomberg, hedge funds in general have returned only 2% so far in 2014, the worst year since 2011. That forced the closure of 461 funds in the first half of the year, on pace to be the worst year for such moves since 2009.

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