Insider Monkey tracks 300+ hedge funds and several other prominent investors. We believe investors can beat the index funds by imitating best hedge funds’ stock picks and avoiding worst hedge funds’ picks. One of the ways of determining the “best” and “worst” hedge funds is measuring the performance of their 13F portfolios. Our methodology limits its analysis to S&P 500 constituents. This way we can compare hedge funds’ performance to the S&P 500 index and we can also compare one hedge fund to the other. Some hedge funds have stocks and put options, or call options and put options in the same company. We excluded put option positions and assumed that call option positions are equivalent to stock positions.
S&P 500 index gained 0.1% during the second quarter including dividends. Healthcare, utilities, and consumer staples sectors performed much better than the index. Financials and energy sectors performed much worse than the index. Some hedge funds specialize in these sectors and their returns will be artificially high or low because of their sector bias. We haven’t adjusted returns for sector bias. There are also other hedge funds that invest mostly in small and medium cap stocks and these hedge funds have only small number of investments in S&P 500 constituents. We haven’t excluded any hedge funds from our sample due to small number of observations but we reported the number of stocks that went into the calculations.
Based on our calculations here are the 10 worst performing star hedge fund managers of the second quarter:
1. Eric Sprott – Sprott Asset Management: Eric Sprott had 6 S&P 500 constituents in his portfolio. All of these were extremely small positions compared to his gold and silver stocks. He had $1 Million in Sandisk (SNDK) which lost 10% during the quarter. The value weighted return for Sprott’s 6 picks was -14.2%.
2. Mohnish Pabrai: Mohnish Pabrai had three securities in two S&P 500 stocks: Wells Fargo (WFC) and Goldman Sachs (GS). Goldman Sachs lost 15.9% and WFC lost 11.1% during the quarter. As a result Pabrai’s value weighted return was -13.9%.
3. Bruce Berkowitz – Fairholme: This was a terrible quarter for Bruce Berkowitz who had 15 positions in S&P 500 constituents. He had huge bets in financial stocks such as AIG, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. His weighted average return was -13.3%.
4. Martin Whitman – Third Avenue: Marty Whitman’s two biggest bets in S&P 500 constituents were Nabors (NBR) and Bank of New York Mellon (BK). These stocks lost 20.5% and 14.4% respectively. Whitman’s weighted average return was -12.4%.
5. Boone Pickens – BP Capital: Boone Pickens’ energy bets had a weighted average return of -8.4%. Energy stocks that are in the S&P 500 index had a weighted average return of -5.1% excluding dividends. So Pickens’ stock picks also underperformed the energy sector.
6. John Paulson – Paulson & Co: John Paulson’s positions in S&P 500 constituents lost only 6.6% during the second quarter. Of course Paulson’s Sino-Forest investment isn’t here. Nevertheless his losses are much less than the “at least 20%” predictions mentioned elsewhere in the media.
7. John Burbank – Passport Capital: Burbank had 30 positions in S&P 500 constituents. These positions had a weighted average return of -6.5% almost the same John Paulson’s return. Previously we covered Burbank’s best investment idea for 2011 here.
8. Philippe Jabre – Jabre Capital Partners: Jabre’s 41 positions had a weighted average return of -5.6%.
9. Eddie Lampert – ESL Investments: Eddie Lampert’s 8 positions in large-cap stocks lost 4.1% during the second quarter.
10. David Tepper – Appaloosa Management: David Tepper wasn’t bearish enough on banking stocks. His 32 positions in S&P 500 constituents lost 3.2%.
If you wonder how other hedge funds performed during the second quarter and first half of the year, we will post our calculations on each hedge fund’s page shortly. Earlier we published the list of 25 best hedge funds of Q2 2011.