Media has an inherent bias towards hedge funds. When bull market is raging, they criticize hedge funds for not keeping up with the S&P 500 Index. The main theme of their articles is like hedge fund managers are getting paid millions of dollars, yet they can’t even beat a low cost index fund.
Now that the volatility in the market increased and hedge funds are outperforming index funds, their tone shifted towards “crowded hedge fund positions are trailing the market”. How do they know that hedge funds aren’t hedging those positions by shorting highly leveraged low quality stocks that even lose more during times of market volatility? WSJ said the following in an article today:
“Hedge funds that rode the technology wave up are getting bruised on the way down. Tiger Global Management posted an 11% loss in its tech-focused hedge fund last month, according to people familiar with the firm. The fund is up roughly 10% for the year through October”
What?? Unless you started investing with Tiger Global at the end of September, you should be happy about beating the market by about 10 percentage points this year.
The truth isn’t very complicated. Hedge funds are talented at picking stock, but an average hedge fund can’t generate enough alpha to justify a 2-and-20 compensation structure. The solution isn’t badmouthing hedge funds. We found the solution. Not all hedge funds are created equal. Best hedge funds are usually closed to investors, meaning that even if you wanted to invest in them they wouldn’t accept your money. Insider Monkey identifies the 100 best performing hedge fund and then includes 5 to 15 of their consensus stock picks in its flagship “best performing hedge funds strategy”. This strategy managed to beat the market by more than 54 percentage points since its inception in May 2014 through the end of August (see the details here). I mean it. Go check the details. If you create a free account, you can also download a free issue of our quarterly newsletter.
In this article we are going to list the 25 most popular stocks among hedge funds and see how each of these stocks performed in relation to the S&P 500 Index in October. Overall, an equal-weighted portfolio of the 25 most popular hedge fund stocks lost an average of 7.2% in October, vs. S&P 500 ETF (SPY)’s 6.5% loss. These stocks managed to generate a cumulative return of 3.9% during the first 10 months of this year (despite the “huge” losses in October), vs. a gain of 2.7% for SPY.
As you can see “crowded” hedge fund stocks are actually outperforming the market by more than a percentage point so far this year. This is what we observed when we calculated back returns for the most popular hedge fund stocks. These stocks managed to outperform the market by about 1-2 percentage points per year on average. It’s not a huge outperformance but it isn’t easy to outperform the market by picking large-cap stocks. That’s why our strategy focuses on small and mid-cap stocks and beat the market by more than 54 percentage points in 4 years or so.
Now, let’s take a look at each of the 25 most popular hedge fund stocks:
25. Aetna Inc. (AET)
Number of Hedge Funds: 69
Total Dollar Amount of Long Hedge Fund Positions: $9.7 billion
Percent of Hedge Funds with Long Positions: 10.7%
October Return: -2%
Return Through October 31: 11.2%
Noteworthy Hedge Fund Holders: Farallon Capital, Glenview Capital