Hedge Fund Performance Q2 2012

BERKSHIRE HATHAWAYInsider Monkey is in the business of monkeying best hedge funds' best stock picks. We are looking for hedge funds with the best long stock picks. We believe we can outperform hedge fund clients who surrender 2% of their savings and 20% of their returns for the privilege of turning hedge fund managers into billionaires. Sure, imitating hedge funds have some disadvantages like we get to see hedge funds’ long positions once a quarter and that’s with a 45 day delay. It is also true that they may not even be holding those shares by the time we are buying them. However, we don’t think that makes a huge difference in terms of performance. We follow hedge fund managers who hold on to stocks for long periods of time, so in some cases we even pay a lower price than what they initially paid. We also don’t have to invest in a hedge fund manager’s 50th best idea. We can just pick the top stock picks of best hedge fund managers and may even be able to beat them in their own game. That’s what Alfred Winslow Jones, the father of the hedge fund industry, did.

Here are the best performing hedge funds of the second quarter (check out first quarter's best hedge funds). Each of these fund manager’s long stock picks in the largest 1000 stocks had a value-weighted return of at least 4.5%. S&P 500 ETF (SPY) lost 2.8% during the same time period.

1. Palo Alto Investors - William Leland Edwards: Palo Alto Investors had a phenomenal second quarter. Their 6 stock picks returned an average of 26.2% during the second quarter. Onyx Pharmaceuticals (ONXX) returned 76%, Questor (QCOR) returned 42%, Medivation (MDVN) gained 22% and Biomarin (BMRN) added 16% during the second quarter (check out Palo Alto Investors' portfolio).

2. Baker Bros. Advisors: Julian and Felix Baker's 7 large-cap stock picks returned 15.8% during the second quarter. The fund's fifth largest position, Incyte Corp (INCY), returned 17.6% during the quarter (check out Baker Bros. Advisors top picks).

3. Luxor Capital Group: Christian Leone's 11 large-cap stock picks had a weighted average return of 4.6%. Leone's biggest bet in this group was Express Scripts (ESRX) which gained 3% during the second quarter. Leone's second biggest position contributed the most to Luxor's outperformance. Luxor Capital had $115 million invested in TripAdvisor (TRIP) which returned more than 25% during the second quarter (see Christian Leone's top picks).

You can check the rest of the rankings on our hedge fund page. Please see best performing hedge funds and worst performing hedge funds.

Warren Buffett, Nelson Peltz, and Barry Rosenstein are some of the fund managers who outperformed the market in the second quarter. Whitney Tilson, Prem Watsa, and Boaz Weinstein had terrible stock picks.

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