5 Most Successful Quant Hedge Funds And Their Top Picks

The prominence of quantitative hedge funds in the alternative asset management space has increased exponentially since the turn of the century, with several of them now considered the titans of Wall Street. Although there is discord among financial historians regarding who started the first quant hedge fund, most of them agree that it is either the famed mathematician Edward ‘Ed’ O. Thorp, who founded Princeton/Newport Partners in 1974, or another academic, Helmut Weymar, who started the Commodities Corporation with Amos Hostetter, Sr. in 1969. Regardless of who started the first pure quant hedge fund, the truth is that the use of algorithmic or systematic strategies for making trading decisions is nothing new. According to finance gurus, the teachings of notable investors like Benjamin Graham, who mastered the art of investing long before Mr. Thorp and Mr. Weymar came into the picture, can also be classified as a systematic strategy because it also involves making trading decisions based primarily on data.

In a broader sense, the only difference that separates investors who focus on fundamentals, macros or monetary policies from investors who rely on quantitative analysis is that the strategies used by the latter can easily be coded and executed without the need for making discretionary decisions. The hedge funds that have mastered this art of finding inefficiencies in the market and building a system to trade on it have generated startling returns in the past few decades. The famed Medallion Fund run by Renaissance Technologies, which has been closed to outside investors for a long time now, is believed to have generated average annual returns in excess of 70% for more than two decades; something unheard of and unmatched outside of quant hedge funds.

Considering the remarkable feats that quantitative hedge funds have achieved, in this article we’re going to focus on the five most successful quant hedge funds in the country today and will discuss each of their top stock picks as of the middle of this year.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details).

AQR Capital Management

– Top Pick (as of June 30): Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned (as of June 30): 13 Million

– Value of the Holding (as of June 30): $665.13 Million

Cliff Asness‘ AQR Capital Management has held a stake in Microsoft Corporation (NASDAQ:MSFT) for more than 12 years now. Although the fund reduced the size of its position in the software behemoth marginally during the second quarter, by 1%, Microsoft Corporation (NASDAQ:MSFT) managed to move ahead of Apple Inc. (NASDAQ:AAPL) during that time to become AQR’s top stock pick as of the end of June. The better-than-expected second-quarter numbers that the company reported in July, coupled with the announcement that it will be acquiring LinkedIn, helped Microsoft’s stock break above the trading range it was confined in for many months. Though the stock has appreciated by only 7.85% in 2016, it is currently trading at its lifetime high of $59.88, after a 4% gain on Friday. The stock currently sports a forward yield of 2.6%, though growth in that regard could slow considerably from here on. The consensus forecast for Microsoft’s forward 10-year dividend growth rate has declined considerably in the last few months and currently stands at around 5%, which is much lower than the 15% average annual growth in the company’s dividends over the past ten years.

We’ll check out the top stock picks of four other successful quant hedge funds on the following two pages.

D E Shaw

– Top Pick (as of June 30): Amazon.com, Inc. (NASDAQ:AMZN)

– Shares Owned (as of June 30): 1.19 Million

– Value of the Holding (as of June 30): $850 Million

D.E. Shaw, founded by billionaire David E. Shaw, more than doubled its stake in e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) during the second quarter. Since the third quarter of 2007,when D.E. Shaw initiated its stake in the company, Amazon.com, Inc. (NASDAQ:AMZN)’s stock has appreciated by over 1,000% and is currently trading up by 20.9% in 2016. Despite such a massive rally in the stock, almost all prominent analysts who track it continue to remain bullish on it. Earlier this month, Microsoft cut the price of its Azure virtual machines drastically, by 11-50%, and some investors see this as the start of a price war that could cause significant damage to Amazon’s bottom-line, as 56% of the company’s operating income now comes from its cloud platform Amazon Web Services. Nevertheless, analysts have dismissed those concerns, citing the economies of scale that AWS currently enjoys, which they believe shields it against such moves. Last week, analysts at Morgan Stanley reiterated their ‘Overweight’ rating on Amazon’s stock and also upped their price target on it to $950 from $800, which represents potential upside of 12.7%.

Two Sigma Advisors

– Top Pick (as of June 30): E I Du Pont De Nemours And Co (NYSE:DD)

– Shares Owned (as of June 30): 2.93 Million

– Value of the Holding (as of June 30): $190 Million

Moving on, E I Du Pont De Nemours And Co (NYSE:DD) made its debut in the portfolio of John Overdeck and David Siegel’s Two Sigma Advisors during the second quarter of 2015, the same quarter in which the company won its proxy fight against activist investor Nelson Peltz’s Trian Partners. Although E I Du Pont De Nemours And Co (NYSE:DD)’s stock has been extremely volatile since then, it has appreciated by 4.23% so far this year, as the company awaits regulatory approval for its merger with Dow Chemical Co (NYSE:DOW). On October 3, the same day that European regulators resumed their investigation into the $130 billion merger and announced that they will rule on it next February 6, analysts at Citigroup released a note in which they called the combined company “the stock to own in 2017”, should the merger be completed. Apart from making that call, Citi’s analysts also upgraded both stocks to ‘Buy’ from ‘Neutral’, citing the “massive” cost-cutting opportunity after the merger is completed and the potential for upside in terms of the $3 billion synergy target stated by the two companies.

Renaissance Technologies

– Top Pick (as of June 30): Novo Nordisk A/S (ADR) (NYSE:NVO)

– Shares Owned (as of June 30): 12.95 Million

– Value of the Holding (as of June 30): $696.44 Million

Probably the best performing quant fund on Street since inception, Jim Simons‘ Renaissance Technologies is known for shuffling its portfolio at breakneck speed, which leads to immense trading fees, which is why the fund has charged uncommonly high fees to its investors. However, the fund has held a stake in Novo Nordisk A/S (ADR) (NYSE:NVO) since the third quarter of 2005 and the company has been among its top-five equity holdings for the past several quarters. Interestingly, Novo Nordisk A/S (ADR) (NYSE:NVO) is also the only stock covered in this article that is trading in the red for 2016, being down by 28.7%. A large part of that loss is a direct result of the company lowering its full-year sales and profit forecast during its second quarter earnings release in August, which was partially due to the loss of a key contract for its top-selling insulin drug NovoLog during that period. Following that debacle, the company quickly launched an executive management shakeup in early-September, leading to the announcement that its EVP and head of Corporate Development, Lars Fruergaard Jorgensen, will replace its President & CEO, Lars Rebien Sorensen, who will be retiring at the end of 2016. Sorenson was recently ranked by Harvard Business Review as the top performing CEO in the world, so it’s debatable whether his replacement will be able to fill those shoes. On September 23, analysts at Piper Jaffray initiated coverage on Novo Nordisk’s stock with a ‘Neutral’ rating.

Citadel Investment Group

– Top Pick (as of June 30): Facebook Inc (NASDAQ:FB)

– Shares Owned (as of June 30): 4.57 Million

– Value of the Holding (as of June 30): $522.78 Million

Among all of the quant hedge funds covered in this article, Ken Griffin’s Citadel Investment Group boasted the most valuable U.S. equity portfolio at the end of June. According to its latest 13F filing, that portfolio was worth around $90 billion at the end of the second quarter and consisted of stocks from almost all sectors. However, Facebook Inc (NASDAQ:FB), in which the fund upped its stake by 95% during the first quarter and by 2% during the second quarter, continued to remain its top pick at the end of June. Like Amazon, the multi-year rally in Facebook Inc (NASDAQ:FB)’s stock also doesn’t seem to be coming to an end anytime soon, as it is continues to make new highs every month. For its fiscal third quarter, analysts are expecting the company to report EPS of $0.96 on revenue of $6.9 billion, considerably higher than the EPS of $0.57 on revenue of $4.5 billion that it generated during the same quarter of last year.

Disclosure: None