5 Most Successful Quant Hedge Funds And Their Top Picks

The prominence of quantitative hedge funds in the alternative asset management space has increased exponentially since the turn of the century, with several of them now considered the titans of Wall Street. Although there is discord among financial historians regarding who started the first quant hedge fund, most of them agree that it is either the famed mathematician Edward ‘Ed’ O. Thorp, who founded Princeton/Newport Partners in 1974, or another academic, Helmut Weymar, who started the Commodities Corporation with Amos Hostetter, Sr. in 1969. Regardless of who started the first pure quant hedge fund, the truth is that the use of algorithmic or systematic strategies for making trading decisions is nothing new. According to finance gurus, the teachings of notable investors like Benjamin Graham, who mastered the art of investing long before Mr. Thorp and Mr. Weymar came into the picture, can also be classified as a systematic strategy because it also involves making trading decisions based primarily on data.

In a broader sense, the only difference that separates investors who focus on fundamentals, macros or monetary policies from investors who rely on quantitative analysis is that the strategies used by the latter can easily be coded and executed without the need for making discretionary decisions. The hedge funds that have mastered this art of finding inefficiencies in the market and building a system to trade on it have generated startling returns in the past few decades. The famed Medallion Fund run by Renaissance Technologies, which has been closed to outside investors for a long time now, is believed to have generated average annual returns in excess of 70% for more than two decades; something unheard of and unmatched outside of quant hedge funds.

Considering the remarkable feats that quantitative hedge funds have achieved, in this article we’re going to focus on the five most successful quant hedge funds in the country today and will discuss each of their top stock picks as of the middle of this year.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details).

AQR Capital Management

– Top Pick (as of June 30): Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned (as of June 30): 13 Million

– Value of the Holding (as of June 30): $665.13 Million

Cliff Asness‘ AQR Capital Management has held a stake in Microsoft Corporation (NASDAQ:MSFT) for more than 12 years now. Although the fund reduced the size of its position in the software behemoth marginally during the second quarter, by 1%, Microsoft Corporation (NASDAQ:MSFT) managed to move ahead of Apple Inc. (NASDAQ:AAPL) during that time to become AQR’s top stock pick as of the end of June. The better-than-expected second-quarter numbers that the company reported in July, coupled with the announcement that it will be acquiring LinkedIn, helped Microsoft’s stock break above the trading range it was confined in for many months. Though the stock has appreciated by only 7.85% in 2016, it is currently trading at its lifetime high of $59.88, after a 4% gain on Friday. The stock currently sports a forward yield of 2.6%, though growth in that regard could slow considerably from here on. The consensus forecast for Microsoft’s forward 10-year dividend growth rate has declined considerably in the last few months and currently stands at around 5%, which is much lower than the 15% average annual growth in the company’s dividends over the past ten years.

We’ll check out the top stock picks of four other successful quant hedge funds on the following two pages.