We have been compiling hedge fund filings and publishing the list of most popular stocks among hedge funds since 2012. Hedge funds’ reputation took a big hit over the last 10 years as average returns reported by hedge fund indices significantly underperformed the plain vanilla index funds.
There is nothing more normal or expected than this if you know a little bit of math. By some estimation the assets of hedge funds currently exceed $3 trillion. TAt the end of September the total value of hedge funds’ equity holdings in our database is $2.2 trillion. The total market value of 5000+ publicly traded stocks was close to $45 trillion. This means collectively hedge funds own about 5% of the entire market. Considering that most of the stocks are either owned by passive index funds or long-term shareholders (i.e. they don’t trade much), it is very likely that hedge funds are increasingly trading with each other (i.e. when one hedge fund is selling, another hedge fund is buying from them).
This means, in aggregate, hedge funds can’t generate any alpha at all. It is a zero-sum game. A hedge fund’s gain is another hedge fund’s loss. The only way hedge funds generate excess returns (this is called alpha) is when they trade against a mutual fund or a novice individual investor. As these types of investors shift towards passive index funds at an increasing pace over the last few years, an average hedge fund’s alpha has been shrinking. This is inevitable.
Overall, hedge funds are still able to generate some alpha, but an average hedge fund can’t generate enough alpha to justify a 2-and-20 compensation structure any more. Luckily, we don’t have to invest with an average hedge fund.
Insider Monkey identifies the 100 best performing hedge funds 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 40 percentage points since its inception in May 2014 through the beginning of November (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 30 most popular stocks among hedge funds and see how each of these stocks performed in relation to the S&P 500 Index so far in Q4 and this year. You can check out the list of 25 most popular stocks among hedge funds at the end of June by clicking the link.
Technology stocks such as Apple, Microsoft, Google, Amazon, and Facebook have been dominating these most popular hedge fund stocks rankings over the last 6 years. Interestingly, these stocks have been among the best performing stocks in the S&P 500 index for the last 6 years as well. Investors now call them FAANG stocks. Check out this article from February 2012. Apple, Google, and Microsoft were the top 3 stock picks among hedge funds at the beginning of 2012. In this article you will see that Apple and Google were still among the top 3 at the beginning of 2014. Apple’s dominance of the top 3 lasted until the beginning of 2016 and then it was replaced by Facebook. Facebook was the most popular stock among hedge funds for the most part of last year and this year.
Yesterday we found out that Facebook Inc (NASDAQ:FB) has been dethroned as the most popular stock among hedge funds after more than 15% of former hedge fund shareholders sold off the social media giant in Q3.
The deadline has passed for the latest 13F filing period, with leading money managers revealing their holdings as of September 30, just before the 7% market plunge in October, which hedge funds beat by 4 percentage points. Of course, the financial media loves to rag on hedge funds because it’s an easy story to sell to the masses, and that didn’t change during or after October.
We saw an example of how stories are always framed negatively when the talk recently shifted from how hedge funds can’t beat the market, to how the most crowded hedge fund positions were trailing the market or noting that hedge funds had their worst month in 7 years, losing about 3%. What they didn’t mention was that those 3% losses easily beat the S&P 500 and Russell 3000 in October, by close to 4 percentage points each.
Anyway, if you are serious about outperforming the market, you should pay attention to the 30 most popular stocks among hedge funds. These stocks returned 6.8% year-to-date whereas S&P 500 ETF (SPY) gained only 2.6%.
On the following pages we’ve listed the most popular stocks among the select group of 691 leading fund managers that are tracked by Insider Monkey’s database. There were several major moves up and down the list just ahead of the October market turmoil. We’ll also check in on the performance of those stocks and see which major hedge funds owned them.
30. Express Scripts Holding Company (ESRX)
Number of Hedge Funds: 68
Total Dollar Amount of Long Hedge Fund Positions: $6.9 billion
Percent of Hedge Funds with Long Positions: %9.8
Fourth Quarter Return (through November 14th): %1.5
Year-To-Date Return (through November 14th): %29.3
Noteworthy Hedge Fund Holders: Larry Robbins, David Abrams