Adage Capital Partners’ Favorite Tech Stocks

The underperformance of the hedge fund industry over the past few quarters has of late led several investors to question and criticize the excessive fees (2% and 20%) charged by hedge funds. At numerous institutional investor conferences this year, some of the titans of the industry have admitted that the fees charged by funds, especially those who have consistently failed to generate any alpha, needs to come down. While most leading hedge fund managers share that view regarding fees, they have so far failed to walk the talk by reducing the fees charged by their own funds. Amid this anomaly in the industry, one prominent hedge fund that stands out is Phill Gross and Robert Atchinson‘s Adage Capital Management, which based on the value of assets it manages is currently the world’s largest stock hedge fund.

Unlike most hedge funds Adage Capital Management charges performance fees only after it crosses a hurdle during a year, the hurdle being the returns generated by S&P 500 during that year. Moreover, it also refunds up to half of that performance fees it collects for a year if it fails to beat the S&P 500 in the subsequent year. While this free structure has made the long only hedge fund quite popular among institutional investors over time, the fund hasn’t taken any new money from investors for the past many years.  According to Adage Capital Management’s latest 13F filing, its US equity portfolio at the end of March was worth $36.87 billion. The filing also revealed that  among sectors, the fund was most heavily invested in technology while entering the second quarter with stocks from that sector accounting for 17% of the value of its equity portfolio at the end of first quarter. Considering the fund’s preference, in this post, we are going to take a look at Adage Capital Management’s top five tech stock picks and discuss their performance in 2016 so far.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Amazon.com, Inc. (NASDAQ:AMZN)

– Shares Owned by Adage Capital Management (as of March 31): 556,083

– Value of Holding (as of March 31): $330.11 million

The 12% fall in its stock during the first quarter coupled with Adage Capital Management reducing its stake in the company by 6% during the same period led Amazon.com, Inc. (NASDAQ:AMZN) to lose eight spots quarter-over-quarter in the fund’s equity portfolio and become its thirteenth largest equity holding at the end of December. Though the stock performed poorly in Q1, it has managed to recoup all of those gains in the current quarter and currently trades up 2% year-to-date largely due to the rally it has seen since Amazon.com, Inc. (NASDAQ:AMZN) reported its first quarter numbers, beating the estimates by a huge margin. The company has been in the news after Republican nominee Billionaire Donald Trump accused it of a ‘huge antitrust problem’ and alleged that it has used the Washington Post, which is owned by Jeff Bezos, as a ‘tax shelter’. However, none of this has impacted Amazon.com’s stock and analysts continue to remain optimistic about the company’s future prospects. On May 18, analysts at KeyBanc reiterated their ‘Overweight’ rating and $800 price target on the stock. Hedge funds that upped their stake in the company during the first quarter included Alex Snow‘s Lansdowne Partners, which brought its holding up by 19% to 2.2 million shares.