Times are apparently tough for the $3 trillion hedge fund industry. Irritated by plunging returns and high fees, investors pulled out billions from hedge funds in 2016. But our research has proved time and again that hedge funds remain the best stock pickers if we focus our attention to the right areas of their portfolios and moves. For example, the best performing hedge funds’ 30 preferred mid-cap stocks generated a return of 18% in the 12 months ending November 21, while the S&P 500 Index returned about 7.6% in the same period, with more than 51% of the stocks in the index failing to beat the benchmark. Contrary to this, Hedge Fund Research Global Index is up only 1.9% this year. Why? Hedge funds’ aggregate returns are bound to lag the market because these returns are hedged, and are marred by losses that come from short positions.
Billionaire Dan Loeb’s Third Point’s performance is one of the best examples to look at to see the real potential of hedge funds. Comprehensive backtests done by Insider Monkey’s research team show that an investor imitating the fund’s picks returned 1.15% per month from its positions in companies having a market cap in the range of $10 billion- $20 billion during the period 1999-2012, versus S&P 500’s per month return of just 0.12% in the same period.
This a very simple strategy to implement. Every 3 months Dan Loeb’s Third Point discloses the US equity holdings of its portfolio in a 13F filing. An investor gets to see Loeb’s September 30th holdings on or around November 14th. If that investor bought Loeb’s mid-cap holdings by the end of November and held on to these stocks for 3 months (until the next quarterly filing), he/she would have outperformed the passive index funds that invest in large-cap stocks by more than 12 percentage points a year. This example is just one glimpse of the benefits of tracking hedge funds with a smart approach and keen research.
Let’s analyze Third Point’s mid-cap picks of the third quarter.
Dell Technologies Inc (NYSE:DVMT)
Third Point dumped 3.7 million shares of Dell Technologies Inc (NYSE:DVMT) in the third quarter, cutting its stake in the Texas-based technology company by a whopping 61%. The fund now has $109.94 million stake in Dell. The stock is up over 7% year-to-date. The company reported third quarter EPS of $0.76, while non-GAAP revenue totaled to $16.8 billion, versus $12.67 billion reported last year. Of the 750 funs in our system, 86 were long Dell Technologies Inc (NYSE:DVMT) at the end of the third quarter.
Shire PLC (ADR) (NASDAQ:SHPG)
Third Point sold 50,000 shares of Shire PLC (ADR) (NASDAQ:SHPG) in the September quarter, and moved into the last quarter of 2016 with 900,000 shares of the UK-based biotechnology company. The total worth of the update stake is $174.47 million. JPMorgan Chase & Co. reaffirmed their ‘Overweight’ rating for the company in a report published on December 5, while Deutsche Bank and AlphaValue also gave a ‘Buy’ rating for the company on the same day. Last week, Shire said its Phase 3 clinical trial of VONVENDI to treat bleeding in adults with severe von Willebrand disease (VWD) met its primary endpoint. The stock is down over 20% year-to-date. 50 hedge funds in our database held stakes in Shire PLC (ADR) (NASDAQ:SHPG) at the end of the third quarter, down from 64 a quarter earlier.
On the next page, we will discuss some more Dan Loeb’s important picks.