If you could buy only 5 stocks that you have to hold for a few years, hedge funds’ top 5 stock picks are probably the best 5 stocks you could buy. You probably heard about James Surowiecki’s book, The Wisdom of Crowds, which argued that the average estimate of a group of people’s predictions will be more accurate than the predictions of the most of the members of the same group. The book started with sharing the following anecdote at a county fair. The crowd was asked to guess the weight of an ox. The average of all guesses made by the crowd was closer to the actual weight of the ox than most of the guesses made by the crowd.
The technical term for the method advocated by Surowiecki is called composite forecasting. We can generate very accurate predictions about the true value of a variable when we combine the predictions of several independent methods. The key phrase here is “independent”.
When hedge fund analysts independently pick the best stocks to buy, their stock picks may or may not outperform the market. However, when we aggregate “independently picked best stock picks” from hundreds of different hedge funds, the list of stocks we come up with will be more likely to outperform the market. At least this is what composite forecasting theory tells us.
Hedge funds are among the highest paid money managers and they are supposed to be experts at identifying the best investment opportunities. Several hedge fund managers became billionaires by picking stocks for their clients and these clients would have walked away if these fund managers weren’t really good at picking stocks.
That’s why we, at Insider Monkey, have been tracking the stock picks of more than 800 hedge fund managers every quarter and identify their consensus stock picks. Since the beginning of 2014 through the end of June 2020 hedge funds’ top 5 consensus stock picks returned 179% whereas the S&P 500 ETF (SPY) returned 90.1% during the same period. If you invested $10,000 into hedge funds’ top 5 picks instead of buying an index fund at the beginning of 2014, you would have had $27,900 at the end of June instead of $19,100. This is a huge, meaningful outperformance that supports our “composite forecasting” theory. Keep in mind that S&P 500 Index’s return would have been significantly lower than 90% if it weren’t invested in the top 5 hedge stocks.
We just finished processing 13F filings from 823 hedge funds and identified the top 5 stocks among hedge funds. Not surprisingly the list of these top 5 stocks didn’t change from Q1 of 2020. In fact, the names of these top 5 stocks didn’t change at all since early 2019. If you rather want to watch a video of these top 5 hedge fund stocks, please see our Youtube video below and don’t forget to subscribe to our channel.
Here are the top 5 hedge fund stocks at the end of June:
5. Alibaba (NYSE:BABA): $273.50
Number of Hedge Funds: 154
Total Dollar Amount of Long Hedge Fund Positions:$24.4 billion
Percent of Hedge Funds with Long Positions: 18.7%
2020 Return (through August 21st): 25.3% vs. SPY’s 6.6% gain
Popularity Ranking (Q1): 4
Noteworthy Hedge Fund Shareholders: Ken Fisher