Our flagship small-cap hedge fund strategy returned 100.4% in its first two years, vs. 48.2% gain for the S&P 500 index ETF (SPY) during the same period. Our monthly returns are presented below.
We aren’t one of those slimy newsletter marketers who try to part mom-and-pop investors from their hard earned dollars by touting the incredible returns of SOME of their recommendations. The majority of active fund managers can’t beat the market after taking into account the fees they charge. In fact, the majority of investment professionals you come across can’t beat the market. If beating the market is so darn difficult, how did we do it?
Our research director has a Ph.D. in financial economics and he has been doing quantitative stock research for more than a decade. This doesn’t mean that he can beat the market but it means that he can at least do high quality research and understand the research done by other academics.
He analyzed the quarterly 13F filings made by almost all of the active and dead hedge funds covering the 10-year period between 1999 and 2009. His research revealed that ordinary investors could have outperformed the S&P 500 index by 18 percentage points per year during this 10 year period by imitating certain hedge fund stock picks. The stock market was flat during this 10 year period, yet our strategy returned an average of 18% per year.
Our thesis is very simple. Hedge funds are strongly incentivized to outperform the market. Some hedge fund managers make billions of dollars in a single year if they generate decent returns. They hire the smartest students graduating from the best universities in the world. They hire those students’ professors. They hire the top experts and consultants in the field to gain just a tiny edge over other investors – including you. And sometimes they cheat and get their hands on illegal inside information. However, we think that hedge funds are more likely to get an edge over ordinary investors in small-cap stocks because these stocks aren’t well-covered and well-researched by a lot of investors. So, we formed our thesis:
When several hedge fund managers buy the same small-cap stocks, those small-cap stocks should outperform the market on average.
This is a very simple and intuitive thesis. Think about it. If hedge funds can’t beat the market by picking under-researched small-cap stocks, they sure can’t beat the market by picking large cap stocks that are followed by everyone.
We weren’t surprised that hedge funds’ most popular small-cap stock picks outperformed the market by 18 percentage points.
However, this is only the first step. The real test is measuring the performance of this strategy in real life. There are a lot of strategies that worked in the past that don’t work anymore.
We launched our quarterly newsletter at the end of August 2012 and started sharing the stock picks of our small-cap hedge fund strategy with our premium subscribers. In its first year our small-cap strategy’s stock picks returned 47.6% and beat the S&P 500 index by more than 29 percentage points. In its second year our strategy’s stock picks returned 35.8% and beat the S&P 500 index by more than 10 percentage points. Since its inception at the end of August 2012, this strategy returned 100.4% through the end of August 2014.
Here are the monthly returns of this strategy:
There aren’t any gimmicks. We pick 15 stocks every quarter and invest equal amounts on each position. In order for you to evaluate whether this strategy is the right one for you, we will share ALL of OUR stock picks in our first year.
Issue 1 (Published on August 31, 2012): Our Small-Cap Strategy outperformed the market by 7.1 percentage points in 2.5 months.
Small-Cap Strategy Return: 4.2%
S&P 500 ETF (SPY) Return: -2.9%
1. United Rentals (URI): 20.6%
2. Lennar (LEN): 11.5%
3. Amylin Pharmaceuticals (AMLN): This stock was acquired on August 9th by Bristol Myers and we weren’t able to buy this stock for our portfolio.
4. Gen-Probe Inc (GPRO): This stock was acquired on August 1st and we weren’t able to buy this stock for our portfolio.
5. Visteon (VC): 5.2%
6. Hologic Inc (HOLX): -0.7%
7. W.R. Grace (GRA): 8.0%
8. American Eagle Outfitters (AEO): -10.7%
9. Louisiana-Pacific Corp (LPX): 18.0%
10. Owens Corning (OC): -3.5%
11. Ariba (ARBA): 0.2% (Ariba was acquired by SAP on October 1st)
12. Lear (LEA): 4.7%
13. US Airways (LCC): 10.3%
14. Corrections Corp of America (CXW): -1.6%
15. Walter Energy (WLT): -11.0%
Issue 2 (Published on November 16, 2012): Our Small-Cap Strategy outperformed the market by 13.4 percentage points in 3 months.
Small-Cap Strategy Return: 25.7%
S&P 500 ETF (SPY) Return: 12.3%
1. United Rentals (URI): 40.9%
2. Visteon (VC): 16.5%
3. TripAdvisor (TRIP): 16.8%
4. W.R. Grace (GRA): 17.7%
5. Marvel (MRVL): 27.2%
6. Medicis Pharmaceuticals (MRX): 2.3% (MRX was acquired by VRX on December 10th)
7. Chicago Bridge & Iron (CBI): 45.6%
8. Ocwen Financial (OCN): 18.6%
9. Lear (LEA): 37.3%
10. Six Flags (SIX): 16.9%
11. Dollar Thrifty Automotive (DTG): This stock was acquired by Hertz on November 19th
12. Sally Beauty Holdings (SBH): 12.1%
13. E*Trade Financial (ETFC): 42.4%
14. Questcor Pharmaceuticals (QCOR): 16.5%
15. Dana Holding Corp (DAN): 32.5%
Issue 3 (Published on February 15, 2013): Our Small-Cap Strategy outperformed the market by 3.4 percentage points in 3 months.
Small-Cap Strategy Return: 12.6%
S&P 500 ETF (SPY) Return: 9.2%
1. United Rentals (URI): 4.8%
2. Gardner Denver Inc (GDI): 9.1%
3. MetroPCS Communications (PCS): 14.4% (This stock was acquired by T-Mobile on May 1st)
4. Visteon (VC): 13.6%
5. W.R. Grace (GRA): 7.5%
6. Lear (LEA): 7.9%
7. Owens Corning (OC): 3.1%
8. Genworth Financial (GNW): 17.1%
9. Abercrombie&Fitch (ANF): 5.1%
10. Allscripts Healthcare Solutions (MDRX): 25.1%
11. Brookdale Senior Living (BKD): 4%
12. Ocwen Financial (OCN): 8.4%
13. US Airways (LCC): 31.9%
14. Hillshire Brands (HSH): 14.9%
15. Sally Beauty Holdings (SBH): 13.8%
Issue 4 (Published on May 16, 2013): Our Small-Cap Strategy outperformed the market by 1.1 percentage points in 3 months.
Small-Cap Strategy Return: 2.3%
S&P 500 ETF (SPY) Return: 1.2%
1. United Rentals (URI): -5.9%
2. Visteon (VC): 10.8%
3. Lamar Advertising (LAMR): -9.7%
4. US Airways (LCC): -17.8%
5. W.R. Grace (GRA): 1.3%
6. MetroPCS Communications (PCS): This stock was acquired by T-Mobile on May 1st
7. Owens Corning (OC): -14.3%
8. CommonWealth REIT (CWH): 26.9%
9. Newcastle Investment Corp (NCT): -4.5%
10. Fortinet Inc (FTNT): 9.2%
11. Carter’s Inc (CRI): -1.2%
12. Genworth Financial (GNW): 16.7%
13. Lear (LEA): 19.1%
14. Dean Foods (DF): 8.6%
15. Community Health Systems (CYH): -7.4%
SEE OUR LATEST 15 STOCK PICKS
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Frequently Asked Questions
1. How many issues do you produce in a year, and when are they typically released?
Our primary premium newsletter is produced quarterly and is published around February 15th, May 15th, August 15th, and November 15th of each year.
2. Do you offer any other services besides the quarterly newsletter?
We have also started publishing a monthly mini-newsletter, which costs $50 per month or $300 per year with an annual subscription. In each mini-newsletter, a top-tier hedge fund manager is interviewed and/or analyzed, and 1-2 novel investment ideas are shared.
3. What would I get if I were to subscribe?
Premium newsletter members will receive access to our small-cap hedge fund strategy, which has outperformed the market by 18 percentage points in back-tests covering a 10-year period; this strategy beat the market by more than 52 percentage points in its first 24 months of availability. More than 70 pages in length, the premium newsletter also covers billionaire investors’ best stock picks, and offers an additional ‘secret’ strategy.
4. Does your newsletter give alerts on when to buy and sell and the position percentages of one’s portfolio?
Each quarter we show our subscribers what to sell, what to buy, and what to maintain in their portfolios, within the confines of our strategies.
5. Is there a trial period for your services?
All premium members receive a partial refund if cancelled within 30 days of purchase.
6. Can I cancel after 30 days?
After the 30-day trial period, membership is final for four quarterly issues, i.e., one full year.
7. So how many issues do I actually receive? Does a membership include past quarterly reports too?
Yes. You will receive access to all archived issues and 4 new issues over the next 12 months.
8. What sized companies do you focus on?
In our market-beating small cap strategy, the name speaks for itself. The list of stocks we focus on has market values between $1 billion and $10 billion.
9. How can I pay for Insider Monkey’s premium services?
Premium subscribers may pay via Paypal, check or credit card (over the phone).