You may think that imitating the stock picks of billionaires will make you rich too. You need a reality check. Billionaires start investing differently after they become billionaires. They put most of their money on large-cap stocks because they have too much money to invest it all into small-caps. However, almost all hedge fund managers, including billionaire hedge fund managers, can’t beat the market by a large enough margin by investing in large-cap stocks. That’s one of the reasons why hedge fund investors have been under-performing the market in recent years.
Our research has shown that the 30 most popular stocks among hedge funds outperformed the market by nearly 2 percentage points between 1999 and 2009. Yes, only 2 percentage points. This isn’t enough to justify the high hedge fund fees. On the other hand, investors would have outperformed Vanguard’s index funds by an average of 2 percentage points a year if they had imitated these picks in their personal portfolios. Our research also has shown that hedge funds’ small-cap picks outperformed the market by double digit rates annually between 1999 and 2009 (read the details here). So, overall it is a good idea to pay attention to what hedge funds and billionaires are buying and selling, especially in the small-cap portion of your portfolio.
We recently published the list of the 10 most popular stocks among hedge funds at the close of 2014. Most of those stocks are also very popular among billionaires. This list covers the equity positions of 59 billionaires. We excluded positions that are smaller than $10 million. We ranked each stock by the number of billionaires with bullish positions. As you’ll notice in the forthcoming list, it appears billionaires love merger plays; and credit cards.
1. Allergan, Inc. (NYSE:AGN) is the most popular stock among billionaires. Nearly a third of the billionaires had a position in Allergan at the end of 2014. Billionaires had more than $10 billion invested in the stock, while hedge funds as a group own more than 30% of the stock’s outstanding shares. Bill Ackman, John Paulson, James Dinan and George Soros were among these billionaires. Actavis is in the process of acquiring Allergan. Most billionaires prefer investing in merger arbitrage related stocks; they can get much higher returns than investing in Treasury bonds.
2. Apple Inc. (NASDAQ:AAPL) is the second most popular stock among billionaires. 19 billionaires had more than $10 billion invested in Apple, but this corresponds to less than 2% of Apple’s market value, showing that Apple may be too rich even for their blood. Carl Icahn is probably the most well-known billionaire investor in Apple, and an outspoken bull on the tech giant’s potential. Others include Ken Fisher, David Einhorn, and Rob Citrone.
3. Actavis Plc (NYSE:ACT) is third on our list, with 18 of the 59 billionaires owning a stake in the pharmaceutical company, whose deal to buy the number one company on the list, Allergan, was unanimously approved by shareholders of both companies towards the tail end of last year. Despite only one less billionaire being invested in Actavis than the top two, there is a steep drop off in the amount of equity allocated to it, as the billionaires had just $6.20 billion invested. Andreas Halvorsen, Dan Loeb, and Daniel S. Och are a few of the billionaire investors in Actavis.