The Insider Monkey data team is finally done processing nearly 750 13F filings and we will start sharing reports based on the aggregate hedge fund sentiment. First, let’s answer why it is important to track hedge funds’ stock moves. Most people think hedge funds don’t have any skill in picking stocks because they have been underperforming the market every year since 2008. There are two reasons for this hedge fund underperformance. First, hedge funds aren’t 100% net long whereas index funds are 100% long. An average equity hedge fund is about 50% net long. This means they will return 6% when the overall market goes up 12%. Second, hedge funds charge 2 percentage points of management fees and 20% performance fees. If their raw return is 6%, they will charge 2 percentage points of management fees and 1.2 percentage points of performance fees. Overall, their net return would have been 2.8% in this scenario. In 2014, an average equity long/short hedge fund returned around 3.2%, so they were able to generate a tiny alpha.
Our research has shown that hedge funds have tremendous skill in picking stocks but investing directly into the hedge funds isn’t the optimal way of taking advantage of this stock picking skill. For instance, investors would have outperformed the market by nearly 2 percentage points a year by investing in the 30 most popular stocks among hedge funds. In this article we will share the 10 most popular stocks. Our research has also shown that hedge funds are much better at picking small-cap stocks. Hedge funds’ most popular small-cap picks outperformed the market by double digits in our back tests. This makes sense because it is easier to gather valuable information by researching small-cap stocks, whereas the information gap is much smaller in the large-cap space.
Let’s take a look at what hedge funds have been doing recently. You can also check out last quarter’s rankings here.
1. Apple Inc. (NASDAQ:AAPL) is still the most popular stock among hedge funds. At the end of the fourth quarter 20.2% of the 737 hedge funds we track were invested in Apple Inc. This number was 22.7% at the end of the fourth quarter. So, Apple’s popularity went down but it is still the most popular stock. Carl Icahn, Philippe Laffont, and David Einhorn are still among the hedge funds with large Apple Inc. positions. However, David Tepper, George Soros, and Peter Rathjens (Arrowstreet Capital) dumped their entire stake in the tech giant.
2. Citigroup Inc (NYSE:C) went up one spot in the rankings. At the end of 2014, 18.6% of hedge funds were invested in Citigroup Inc. This number was 19.3% at the end of the previous quarter. Billionaires Andreas Halvorsen, Dan Loeb, Leon Cooperman, and Seth Klarman are among Citigroup Inc. shareholders.
3. Actavis Plc (NYSE:ACT) is the only healthcare stock that has ever broken into the top 3 most popular stock since we started publishing this list. Hedge funds collectively own more than 20% of Actavis Plc’s outstanding shares. At the end of the fourth quarter, 17.8% of hedge funds were invested in this healthcare stock. Billionaires were also extremely bullish about Actavis. Billionaires Andreas Halvorsen, Dan Loeb, Daniel Och, Larry Robbins, Barry Rosenstein, John Griffin, John Paulson, and James Dinan were among the top 10 holders.