In the user guide for HP ALM 12.20 it states that you create folders, create TestSets in the folders, and then assign the folders to the cycle.

From Page 170 of the HP ALM User guide:

After assigning requirements to releases and cycles, you create test set folders and
assign them to cycles. A test set is a group of test instances in an ALM project designed
to achieve specific test goals. After assigning test set folders to a cycle, you run the
test sets under these test set folders.