Equity hedge funds on average hedge around 30-70% of their long exposure depending on their views of the market conditions. We have been in a bull market since March 2009. S&P 500 Total Return Index was trading at 1095 on March 9th whereas it currently sits at 5427. It delivered an annualized gain of 18.3%.
Hedge funds on the other hand returned an average of around 7% (there is no accurate way of measuring the performance of entire universe of hedge funds as many prominent hedge funds don’t appear in various hedge fund indices). It doesn’t make sense to compare hedge fund returns to the S&P 500 index without adjusting for net exposure. If the S&P 500 Index was only 50% net long, its annual return would have declined to 9.2%. If the S&P 500 Index also charged 2% management fees and 20% performance fees, its annualized return would further decline to 5.75%.
So, overall, hedge funds’ stock picks actually managed to beat the market by a slight margin, but their high fees captured all of this outperformance plus some more. Individual investors shouldn’t invest in hedge funds, but they should imitate the stock picks of hedge funds in their portfolios.
We came up with a better way of illustrating hedge funds’ true stock picking ability and constructed an index that is 100% long. We launched the Insider Monkey Billionaire Stock Index at the beginning of this year. The index is based on the 13F filings of billionaire hedge fund managers and prominent investors. It is composed of the 30 most popular stocks among billionaires and each stock’s weight is equally weighted in the index. Since the beginning of this year our billionaire stock index delivered a cumulative gain of 4.6% through November 16th vs. 3.9% for the S&P 500 ETF (SPY).
We don’t think S&P 500 index will deliver 18% annualized gains in the next 10 years. We are near the peak of earnings cycle. Either the corporate tax rates have to go higher in the future or we will face even higher interest rates both of which are negative for stock valuations. As a result, we believe stocks will probably deliver in the neighborhood of 5% annual gains for the next 10 years. That’s why it is important to boost those gains by carefully selecting stocks. Our best performing hedge funds strategy invests in small-cap stocks and outperformed the S&P 500 ETF by 40 percentage points since its inception in May 2014 through early November (an outperformance of 6 percentage points per year).
Billionaire’s top 30 stock picks are mostly large-cap stocks and in our backtests these stocks outperformed the market by about 1-2 percentage points annually. In the next pages we will share the latest list of 30 stocks that are in Insider Monkey’s Billionaire Stock Index (if you are interested in the 30 most popular stocks among ALL hedge funds, click this link).
30. Citigroup Inc. (C)
Number of Billionaires: 13
Total Dollar Amount of Long Billionaire Positions: $3.9 billion
Percent of Hedge Funds with Long Positions: %9.8
Fourth Quarter Return (through November 14th): %-8.8
Year-To-Date Return (through November 14th): %-10.8
Noteworthy Billionaire Holders: Julian Robertson, Jeff Ubben