What is the best way to invest in the stock market? According to the Investment Company Institute passive funds accounted for 16% of the stock market whereas active funds accounted for 14% at the end of 2021. The rest of the market is owned by individuals, pension funds, life insurance companies, etc. Ten years earlier passive funds owned around 8% of the stock market whereas active funds owned 20%. So, an increasing number of investors believe that there is no way that they can outperform the market and the best way to invest in the stock market is index funds.
I have a PhD in financial economics. I understand that most people aren’t experts in investing and they aren’t privy to information that can move the stocks, so they are kind of forced to invest in index funds. However, I’d like you to know that there are better ways. You can beat the stock market by investing in the consensus stock picks of hedge funds and that’ll take less than 15 minutes of your time every quarter.
I know what you might be thinking. Hedge funds underperform the market on average, so, how can you actually beat the market by imitating them?
Hedge funds, usually, underperform the market during bull markets and outperform during bear markets. Most investors don’t understand that hedge funds are “hedged”. When the S&P 500 Index returns 20+% like it did in 2021, it is a certainty that hedge funds will underperform. It is also a certainty that hedge funds will significantly outperform the market when the market declines 18.2% like it did in 2022. Hedge funds lost 4.25% in 2022 according to HFR. That’s an outperformance of 14 percentage points. The only time I pay attention to hedge fund returns is when I write this quarterly report.
When the markets are up, the financial media complains that hedge funds underperform. When the markets are down, the financial media complains that hedge funds didn’t protect their investors from losses. We don’t pay attention to what an “average” hedge fund delivers because their returns are distorted for two reasons. First, they charge an arm and a leg for the stock picks that are publicly available with a 45-day delay. Second, they hedge but they don’t generate much alpha by hedging. Instead of tracking hedge fund returns, we track the returns of the most popular hedge fund stocks. Over long periods of time these stocks outperformed the market by a very large margin.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this strategy has helped us beat the market over the last 10 years. For instance, between March 2017 and October 2023 our monthly newsletter’s stock picks returned 153%, vs. 99% for the SPY. Our stock picks outperformed the market by 54 percentage points. If you invested $500K into our strategy in March 2017, your portfolio would have grown to $1,265,000 instead of $995,000 for the same portfolio invested in index funds. You can download a sample issue of our monthly newsletter here.
We don’t share our monthly newsletter’s stock picks publicly, but we have been sharing the list of 30 most popular stocks among hedge funds here at Insider Monkey since the end of 2018. The majority of these stocks aren’t traditional value stocks. You can check out our previous article about the 30 most popular hedge fund stocks at the end of the first quarter here. You can also check out the previous lists that are published in 2002Q4, 2022Q2, 2022 Q1, 2021 Q4, 2021 Q3 and 2021 Q2 here. In May 2021, we shared hedge funds’ top 30 stock picks for 2021 Q1. In February 2021, we also shared hedge funds’ top 30 stock picks. We also shared hedge funds’ top 30 stock picks at the end of November 2020. Three months before that we shared hedge funds’ top 30 stock picks for Q2’20. In fact, we have been sharing the list of hedge funds’ top 30 stocks since 2012 in our quarterly newsletter.
This year’s top 30 stocks returned 50.1% through December 14th and outperformed the S&P 500 Index by 25.3 percentage points, while the top 10 stocks returned 69.9%, versus a 24.8% gain for SPY during the same period.
Overall, hedge funds’ top 10 stock picks returned 340.5% since 2014 (through December 14th) and beat the S&P 500 Index by 141.6 percentage points. We have been telling our readers and subscribers for years to imitate hedge funds’ top stock picks. Please keep in mind that more than half of investors invest their money in index funds. By investing in hedge funds’ top 10 stock picks, index fund investors could have generated an extra 141 percentage points in returns.
More than half of all investors invest in dumb index funds because they were made to believe that they can’t outperform the market by stock selection (or they are forced to invest in index funds in their companies’ retirement accounts). Hedge funds’ top 10 stock picks beat the S&P 500 index funds by nearly 142 percentage points over a 10-year period.
Every quarter we process more than 900 hedge funds’ 13F filings and identify the top stocks among ALL 900+ hedge funds. The list of top 10 hedge fund stocks hasn’t changed much since the third quarter of 2018. You can invest in this low turnover simple strategy by subscribing to our quarterly newsletter or simply reading my articles.
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Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. We launched our monthly newsletter’s activist strategy more than 6 years ago and this strategy’s picks returned 153% since then and beat the SPY by 54 percentage points. Our subscription prices start at $99 per year and come with a 14-day full refund guarantee.
Most investors believe that hedge funds lost their “magic touch” a long time ago and can’t beat the market. Don’t trust the returns reported by hedge fund indices. They misrepresent hedge funds’ stock picking skills. Hedge fund indices underperform the market because hedge funds hedge and they charge an arm and a leg for their services. If you want to compare apples to apples, you need to take a look at the performance of the most popular hedge fund stocks vs. the returns of the S&P 500 Index. Apple, Google, Microsoft, Facebook, and Amazon have consistently been among the top 10 hedge fund picks over the last 10 years since we started publishing our quarterly newsletter. You don’t have to be a math wizard to calculate the mind-numbing returns of these technology stocks most of which now trade for more than $1 trillion valuation.
The best thing about following hedge funds’ top picks on our website is that you don’t need to pay hedge funds an annual 2% fee and 20% of your profits to beat the market. We do that here free of charge using the holdings data from the legally required SEC portfolio disclosures. Our approach is also superior to investing directly into hedge funds because we don’t like to invest in a hedge funds’ 35th best idea when we can invest in only the best stock picks of the best hedge funds.
Below we listed the 30 most popular stocks among hedge funds at the end of September 2023. If you are only interested in a more concentrated portfolio, check out the top 10 stocks in this list below:
30. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Funds: 87 (2023Q3)
Number of Hedge Funds: 72 (2023Q2)
Number of Hedge Funds: 72 (2023Q1)
Total Dollar Amount of Long Hedge Fund Positions: $6.2 billion
Percent of Hedge Funds with Long Positions: 9.6%
First Quarter Return: 101.5%
Popularity Ranking (2023Q2): 60
Popularity Ranking (2023Q1): 61
Noteworthy Hedge Fund Shareholders: Cantillon Capital Management, Lyrical Asset Management
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