John Overdeck and David Siegel‘s quant fund, Two Sigma Advisors launched a new fund this year, Two Sigma Absolute Return Macro Master Fund, which managed to raise a massive $3.3 billion, the largest capital among last year’s fresh fund offerings. In 2014 when the average hedge fund return was somewhere between 2.5% to 3%, Two Sigma Enhanced Compass Fund posted eye popping returns of 57.55%.
The $24 billion fund was founded in 2001 by the two D E Shaw veterans, one a computer scientist, the other a statistician, and both united in their belief that technology is an extremely powerful tool when it comes to finding meaningful and profitable data trends in the realm of finance. Keeping this belief in mind and given the fact that the information technology sector constituted the greatest percentage of the firm’s equity portfolio at 22%, we decided to take a closer look at Two Sigma’s top tech picks, according to the firm’s latest 13F filing. These included Google Inc (NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT), Western Digital Corp (NASDAQ:WDC), Yahoo! Inc. (NASDAQ:YHOO) and Micron Technology, Inc. (NASDAQ:MU). The fund’s equity portfolio is well diversified, with its top ten holdings constituting only 9.88% of its total value. According to our methodology, which is based on the weighted average returns of the fund’s long equity positions in companies exceeding $1 billion in market cap, Two Sigma returned 3.2% in the first quarter based on over 1300 holdings, even though most of its top technology picks were in the red. The actual fund’s returns are likely to be different, as our metric doesn’t take into account derivatives and other investment instruments that these managed future funds heavily rely on.
While quant funds posted a strong performance in 2014, we cannot say for sure that computer algorithms will completely replace the stock picking skills of fund managers in the future. A much larger time duration is needed to draw such a conclusion since market drivers differ from year to year. At Insider Monkey, we have developed a trading strategy which is backed by 13 years of back tests and nearly three years of forward testing. Through our research we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month between 1999 and 2012. On the other hand the most popular large-cap picks of hedge funds underperformed the same index by 7 basis points per month during the same period. In forward tests from the end of August 2012 through March 2015, these top small-cap stocks beat the market by a hefty 79.4 percentage points (read the details here).
After initiating a position in Google Inc (NASDAQ:GOOGL) during the second quarter of 2014, Two Sigma increased its stake by a whopping 217% in the third quarter and then by a further 56% in the fourth quarter to about 302,400 shares valued at $160.46 million. The stock, which formed Two Sigma’s most valuable equity holding was the only stock pick among those under discussion that ended up in green over the first quarter, as it gained 4.53%. Google Inc (NASDAQ:GOOGL) has recently confirmed its plans to launch an ad-free subscription service for its video platform, YouTube. Content providers are expected to get a 55% share of the subscription revenue. Among over 700 hedge funds that we track, Boykin Curry‘s Eagle Capital Management and Ken Fisher‘s Fisher Asset Management held the highest stakes in Google Inc (NASDAQ:GOOGL) toward the end of 2014.