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Learning Hedge Fund Portfolio Allocation

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A very interesting concept when analyzing hedge fund portfolios is learning how top portfolio managers allocate their assets under management into their best stock ideas.  While there is a lot of theory about portfolio allocation, I think one of the best ways to learn is by simply analyzing the portfolio allocation of the best fundamental oriented hedge funds. These funds manage billions and have professional teams of fundamental analysts. There is nothing better to study a concept than by observing the concept itself.

hedge fund research

I got the last updated (3Q ’12) portfolios from what I consider the best 29 value oriented hedge funds and created an Excel file where I input the % allocation from each fund’s top 15 ideas. As you will see, some of them hold more than 15 stocks and others less than 12. I simply wanted to answer some specific questions:

– In average, which % from the whole portfolio each fund allocated to the top 15 ideas ?
– How much individual weight they place to the top 5 positions ?
– How many ideas do you need to outperfom the market  ?
– What is best, a concentrated or diversified portfolio ?

How the research started

The first step was selecting the top 29 value oriented funds. I did so by going to Insider Monkey and Gurufocus. While I knew that there are more than 29 great fundamental hedge funds, I know I could not include every name in my research.

The goal was to create a sample in order to learn how they allocated their stock portfolio in the last reported quarter. This is an image of the finished Excel file:

Learning Hedge Fund Portfolio Allocation

Interesting facts from the Excel

After creating the Excel file and calculated the averages I got some interesting facts to analyze:

1) In average70% of the assets under management (AUM) are allocated to the top 15 ideas

This fact reflects that you do not need 100 or more ideas per year to outperform the markets. It seems that these fundamental oriented funds concentrate their investments in just 15 super well-researched names and track those names with deep analysis and focus.

These funds seems to tell you that instead of trying to make hundreds of trades and diversify your holdings into lots of names it is better to focus on the best 15 or 20 ideas the market can offer.

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