In this article, we discussed Two Sigma Advisors‘ performance during the first quarter of 2021 and the fund’s top 10 stock picks as of the end of 2020. We also reviewed the 10 best stocks to buy now according to quant billionaires.
Quant billionaires John Overdeck and David Siegel’s quant hedge fund Two Sigma has extended losses during the first quarter of this year. The firm’s flagship Spectrum fund fell almost 2% year to date while the global macro Compass fund plunged 13% and the Absolute Return fund dipped 3%. Losses were initially blamed on volatility amid the onslaught of Reddit and retail investors. In January alone, New York-based Two Sigma lost 8.6% for its Absolute Return Enhanced fund and 5.3% for its Absolute Return fund.
Computer-powered strategies that rely on historical data to predict future trends presented disastrous results for the quant funds since the beginning of 2020. Credit Suisse claims that quant funds have slashed almost half of their portfolio size during the month of March and their average return plunged to negative 14% this year.
Two Sigma Advisors, which was considered one of the best performing quant hedge funds over the last two decades, has also been struggling due to exceptional market trends. This is contrary to quantitative trading strategies that study a large amount of historic data to predict future trends. Apparently, Two Sigma cofounders’ strong educational background and decades of experience in developing algorithm techniques and trading strategies have not been working for their quant hedge fund over the last few months amid unprecedented volatility.
John Overdeck of Two Sigma Advisors
The mathematician John Overdeck’s and Computer scientist David Siegel’s quantitative strategies have pushed their quant funds assets under management to $60 billion in 2019 from $8 billion in November 2011. Both John Overdeck and David Siegel worked for a quant hedge fund D.E. Shaw & Co before founding their own quant hedge fund. The duo has more than 40 years of experience in developing computer-powered trading models. John Overdeck worked as Managing Director at D.E. Shaw & Co. John did B.S. in Mathematics and M.S. in Statistics. He won a silver medal when he was only 16 years old in the International Mathematical Olympiad. The other co-founder David Siegel, who worked for D.E. Shaw as a Chief Information Officer, has a Ph.D. in Computer Science.
“Quants rely on data from time periods that have no reflection of today’s environment,” said Adam Taback, a chief investment officer of Wells Fargo Private Wealth Management.
“When you have volatility in markets, it makes it extremely difficult for them to catch anything because they get whipsawed back and forth.”
At the end of the fourth quarter, the market value of the Two Sigma Advisors’ 13F portfolio stood at around $37 billion, down from $43 billion in the prior-year period. The New York-based quant hedge fund initiated a position in 343 stocks and increased its existing stake in 802 stocks. The firm also sold out 360 stocks and reduced its exiting position in 1206 stocks. The time held for the top ten positions averages around 1.85 quarters. Billionaires John Overdeck and David Siegel’s quant hedge fund has spread investments across several sectors, including consumer discretionary, information technology, and health care.
David Siegel of Two Sigma Advisors
While John Overdeck’s and David Siegel’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s now start reviewing the 10 best stocks to buy now according to quant billionaires. These stocks are the top picks of quant billionaires John Overdeck and David Siegel.
10. Zoom Video Communications, Inc. (NASDAQ: ZM)
The quant hedge fund raised its stake in Zoom Video Communications, Inc. (NASDAQ: ZM) by 186% in the fourth quarter to 1.01% of the 13F portfolio. The firm first initiated a position in the video calling company in Q4 of 2019. The share price of Zoom Video fell significantly in the December quarter and extended the downtrend into 2021. Its shares are down 33% in the last six months.
Baron Opportunity Fund, which returned 23.02% (institutional shares) in Q4, highlighted a few stocks including Zoom Video in the fourth-quarter investor letter. Here’s what Baron Opportunity Fund stated:
“Zoom Video Communications, Inc. is a cloud-based software company providing a video-first platform for communication. Shares of Zoom declined during the fourth quarter on profit-taking following the strong run in the stock because of accelerated pandemic-driven Zoom adoption, revenue growth, and free cash flow generation. We retain conviction as Zoom remains a leading player in disrupting the $100 billion unified communications market with its scalable, globally distributed, cloud-based, video-first offering, while its well-known brand (Zoom is now a verb!) should enable it to grow profitably as it takes market share.”
9. Merck & Co. Inc. (NYSE: MRK)
Shares of Merck & Co. Inc. fell more than 4% during the first quarter of 2020. It is one of the permanent members of Two Sigma Advisors’ stock portfolio since 2010. The firm increased its position in Merck by 7% to 4.74 million shares during the fourth quarter. It is ranked ninth in the list of 10 best stocks to buy now according to quant billionaires.
Merck also experienced an increase in enthusiasm from the smart money in recent months. It was in 82 hedge funds’ portfolios at the end of December. The all-time high for this statistic is 84.
8. Abbvie Inc. (NYSE: ABBV)
Two Sigma lowered its position in Abbvie Inc. (NYSE: ABBV) during the fourth quarter by 15% to 3.65 million. The firm first initiated a position in the health care company in 2013. Following a strong rally in the December quarter, shares of Abbvie underperformed so far in 2021. Abbvie offers a healthy dividend yield of 4.87%, which makes it a good stock to buy and hold. ABBV ranks 8th in the list of 10 best stocks to buy according to quant billionaires.
The number of bullish hedge fund bets on AbbVie increased by 1 in recent months. It was in 83 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all-time high for this statistic is 89.
7. The Home Depot, Inc. (NYSE: HD)
The share price of Home Depot, Inc. (NYSE: HD) accelerated the upside momentum into 2021. Its shares are up close to 60% in the last twelve months. The firm first initiated a position in Home Depot in 2013 and reduced its stake by 10% in the December quarter. Despite that, quant billionaires held 1.55 million shares of the home improvement company.
HD ranks 7th in the list of 10 best stocks to buy according to quant billionaires.
Madison Funds, an independent investment management firm, highlighted a few stocks including The Home Depot in the fourth-quarter investor letter. Here is what Madison Funds stated:
“At the very end of the year, we received cash for our shares of HD Supply, which had agreed to be acquired by Home Depot. We initially invested in the summer of 2019, so it was a short but successful investment. It’s full circle for Home Depot, as this was a business that it used to own (no prize for guessing what the “HD” in HD Supply stood for) but had divested in 2007 when a new CEO took over and was intent on simplifying the company to clean up the mess created by his predecessor. Today, Home Depot is much stronger company, and HD Supply too is a much stronger and more focused company, having itself shed many businesses to concentrate on its crown jewel, the facilities distribution business. While we certainly contemplated that it might get acquired at some point given that there were a handful of logical buyers, our investment didn’t rely on that happening. We would have been happy to hold on for a longer ride. But we’re not going to complain about a bird in hand.”
6. Target Corporation (NYSE: TGT)
The general merchandise retailer Target Corporation (NYSE: TGT) continues to generate big returns for investors in 2021. Its shares rose 15% year to date and are up 109% in the last twelve months. Strong revenue growth trends are backing TGT share price. It is ranked sixth in the list of 10 best stocks to buy now according to quant billionaires.
TGT ranks 6th in the list of 10 best stocks to buy according to quant billionaires.
Investors should be aware of an increase in enthusiasm from smart money lately. Target Corporation was in 78 hedge funds’ portfolios at the end of December. The all-time high for this statistic was previously 57. This means the bullish number of hedge fund positions in this stock currently sits at its all-time high.
5. Visa, Inc. (NYSE: V)
Two Sigma Advisors has been holding a stake in Visa (NYSE: V) since 2016. The firm increased its position in the payment technology company by 24% in the December quarter to 1.95 million shares. Visa stock price recovered strongly during the second half of 2020, but its shares are struggling to sustain those gains in 2021.
Visa has seen an increase in hedge fund sentiment in recent months. It was in 166 hedge funds’ portfolios at the end of the fourth quarter of 2020 compared to the all-time high for this statistic of 160. This means the bullish number of hedge fund positions in this stock currently sits at its all-time high. There were 160 hedge funds in our database with V holdings at the end of September.
4. Amazon.com (NASDAQ: AMZN)
The e-commerce platform Amazon.com (NASDAQ: AMZN) is among the 10 best stocks to buy now according to quant billionaires. Two Sigma increased its position by 83% in Visa during the December quarter to 131,911 shares. However, Amazon’s stock price underperformed during the first quarter of this year due to a broader correction in tech stock prices.
Mairs & Power, an investment management firm, stated in a Q4 investor letter that Amazon’s rising margins and advertising business are among the catalysts. Here is what Mairs & Power stated:
“We did acquire AMZN in the fourth quarter. But not owning it till then cost the Fund in performance relative to the S&P 500 TR Index. We had held off taking a position in Amazon largely due to concerns about the company’s slim margins. But in 2020, we saw its core margins nearly double as more consumers shopped online, which in turn led to greater utilization and route density within Amazon’s delivery network. In addition, Amazon’s advertising business, which represents a small portion of its overall sales, has been growing quickly. Advertising could become the third leg of growth for the company along with e-commerce and Amazon Web Services. In short, Amazon checks all of our boxes — it has a strong management team, great growth prospects, and a strong competitive advantage. And last year, we initiated our position at an intriguing valuation.”
3. Cisco Systems Inc. (NASDAQ: CSCO)
Cisco Systems is also a long-running investment of Two Sigma Advisors. The firm first initiated a position in Cisco in 2013. It is currently the third-largest stock holding of the quant fund Two Sigma. Shares of Cisco Systems grew 15% year to date amid prospects for sales growth on economic reopening. Hedge funds are showing confidence in Cisco’s fundamentals. Cisco Systems was in 60 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all-time high for this statistic is 68.
2. Facebook, Inc. (NASDAQ: FB)
Two Sigma Advisors increased the stake in Facebook Inc (NASDAQ: FB) by 124% during the December quarter to 1.7 million shares. It is ranked second in the list of 10 best stocks to buy now according to quant billionaires. The firm first initiated a position in FB in 2013. The Facebook share price has been struggling this year after generating robust gains in 2020.
Kinsman Oak Capital Partners Inc., an independent Toronto-based boutique investment firm, highlighted a few stocks including Facebook in their Q4 investor letter. Here’s what Kinsman Oak Capital Partners stated:
“Our view on Facebook (FB) may be somewhat controversial. The bear case for FB boils down to antitrust risk and valuation. Facebook, although to a lesser degree, is a relative value bargain as well. We believe the company possesses an element of platform risk that Alphabet does not but, compared to the rest of the market, the stock still seems undervalued. We compared Facebook to the Russell 2000, an index full of cyclical businesses that are considered no-brainers at the beginning of a recovery and popular re-opening stocks that are poised to go higher after the vaccine is distributed (Appendix E). Facebook is significantly cheaper, growing faster, has a larger economic moat, superior margin profile, and requires less capex.”
1. Microsoft Corporation (NASDAQ: MSFT)
The quant hedge fund held more than 3 million shares of Microsoft Corporation (NASDAQ: MSFT) at the end of the fourth quarter of 2020, representing 1.82% of the overall portfolio. Shares of MSFT extended the upside momentum into 2021 on the back of sharp financial growth projections. The tech giant also offers hefty dividends to investors.
Bretton Fund, which returned 11.52% for the fourth quarter, highlighted a few stocks including Microsoft in the Q4 investor letter. Here is what Bretton Fund stated:
“Microsoft’s stock also had a great year, returning 42.4% on increased earnings per share of 30%. The main driver of their growth in recent years is their cloud computing business, and while it did see a bump in demand as office workers went remote, most of the growth is from the continued shift of corporate computing systems to “the cloud.” We think this shift is still in its early stages.”
You can also take a peek at 10 Best Small-Cap Biotech Stocks Under $10 in 2021 and 10 Best Silver Stocks To Buy.
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This article is originally published at Insider Monkey.
