“The combination of historically low interest rates — $13 trillion of global government debt, over 20% of the total outstanding, yields less than-zero— and historically high levels of technological disruption, has created a stock market with a number of distinct segments that have widely varying valuations. Any judgment about the overall level of the stock market misses the nuance of these underlying extremes,” said Lone Pine Capital’s 2019 Q2 investor letter.
This sounds like the perfect setup for hedge funds to outperform the market on the long side of their portfolio. Last quarter we listed hedge funds’ top 30 stock picks for the second quarter of 2019. While the S&P 500 ETFs returned around 4.2% and Russell 2000 ETF (IWM) gained only 1.9% during the second quarter, hedge funds’ top 30 stock picks returned 5.5%. Interestingly, hedge funds’ top 3 stock picks returned an impressive 12% during the second quarter.
If you are thinking that this is just coincidence, you are wrong.
Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. Our flagship strategy identifies the best stock picks of the 100 best performing hedge funds. This strategy outperformed the S&P 500 Index by 40 percentage points since its inception 5 years ago. This means if you had invested $100,000 into our strategy instead of an S&P 500 Index fund, you would have $40,000 more money today.
Hedge funds’ top 3 stock picks are great and we expect them to outperform the market but they aren’t going to double or triple in the next 5 years. In the last issue of our monthly newsletter we identified another large-cap growth stock that is trading at less than 3 times of its core earnings. This fact is obscured by its large cash holdings and equity stakes in other companies, as well as its large investments in future growth. Currently we are running a promotion. We guarantee that this stock will return at least 20% in the next 12 months. If this doesn’t happen for any reason, we will refund your entire subscription fee as well as send you an additional $100. This means we are going to give you refund plus $100 even when the market declines 20% and this stock gains only 19% (see the details here).
Most investors believe that hedge funds lost their “mojo” a long time ago and can’t beat the market. Don’t trust the returns reported by hedge fund indices. A large number of well known hedge funds don’t report their holdings to hedge fund databases. The ones that report might underperform the market because their portfolios are hedged or carry large amounts of cash. If you want to compare apples to apples, you need to take a look at the performance of 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 3 hedge fund picks over the last 7 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 around $1 trillion valuation.
Investors really need to pay attention to the top stock picks of hedge funds. You need to pay them an annual 2% fee and 20% of your profits to find out their top stock picks. 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 June. Third quarter has been rough for most stocks. S&P 500 Index ETFs lost 0.2% while Russell 2000 ETF (IWM) lost 4.3% during the first 2 months of the third quarter. Nevertheless fifty seven percent of the 30 most popular hedge fund stocks delivered positive returns during the third quarter and their average return was 0.6%. If you are looking for a group of stocks that historically performed even better than these mostly large-cap stocks, you can check out our quarterly newsletter for 14 days free of charge. Our small and smid cap stock picks returned 29.5% year-to-date and outperformed the market by more than 12 percentage points. If you are only interested in large-cap stocks, check out the top 10 to 15 stocks in this list below:
30. Merck & Company, Inc. (NYSE:MRK): $86.47
Number of Hedge Funds: 70
Total Dollar Amount of Long Hedge Fund Positions:$4.9 billion
Percent of Hedge Funds with Long Positions: 9.6%
Third Quarter Return (through Aug 30th): 3.1%
Popularity Ranking (Q1): 40
Noteworthy Hedge Fund Shareholders: Cliff Asness, Peter Rathjens, Bruce Clarke and John Campbell