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Hedge Funds’ Top Picks Killed The Market in October

October has been good to investors. Companies reported better than expected earnings as usual, but more importantly aggregate results didn’t indicate any signs of a 2020 recession. We aren’t wearing rose colored glasses regarding a trade deal with China. Trump’s Chinese opponents clearly outplayed him so far and  they are determined to wait him out while avoiding damaging tariffs to their economy. As a result of all of these developments S&P 500 Index hit another record high in October, returning 1.9% through October 31st (10:26 am). The most popular stock among hedge funds is Facebook Inc according to the most recent 13F filings. Microsoft, Google, Amazon, and Alibaba are the four other most popular hedge fund stocks in our list. All of these stocks outperformed the S&P 500 Index in October. The best performing stock in this list is also the most popular stock in this list: Facebook.

Facebook Inc (NASDAQ:FB) investors should be aware of an increase in enthusiasm from smart money recently. FB was in 182 hedge funds’ portfolios at the end of the second quarter of 2019. There were 176 hedge funds in our database with FB positions at the end of the previous quarter. If you are interested in seeing the list of the 30 most popular stocks among hedge funds, you can watch the video below.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at the new hedge fund action encompassing Facebook Inc (NASDAQ:FB).

How have hedgies been trading Facebook Inc (NASDAQ:FB)?

At the end of the second quarter, a total of 182 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the previous quarter. On the other hand, there were a total of 193 hedge funds with a bullish position in FB a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Tiger Global Management LLC was the largest shareholder of Facebook Inc (NASDAQ:FB), with a stake worth $1732.2 million reported as of the end of March. Trailing Tiger Global Management LLC was Citadel Investment Group, which amassed a stake valued at $1630.9 million. Viking Global, AQR Capital Management, and Eagle Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

As one would reasonably expect, specific money managers were breaking ground themselves. SRS Investment Management, managed by Karthik Sarma, established the most valuable call position in Facebook Inc (NASDAQ:FB). SRS Investment Management had $447.4 million invested in the company at the end of the quarter. John Armitage’s Egerton Capital Limited also made a $332.9 million investment in the stock during the quarter. The other funds with brand new FB positions are OZ Management, Anand Desai’s Darsana Capital Partners, and Panayotis Takis Sparaggis’s Alkeon Capital Management.

Let’s also examine hedge fund activity in Amazon.com, Inc. (NASDAQ:AMZN), Alibaba Group Holding Limited (NYSE:BABA), Alphabet Inc (NASDAQ:GOOGL), and Microsoft Corporation (NASDAQ:MSFT). These are hedge funds’ favorite stock picks.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position Return (October)
AMZN 163 24196806 -3 2.3%
BABA 127 16582991 10 5.3%
GOOGL 129 10109482 -18 2.7%
MSFT 167 25831026 -3 3.6%
Average 146.5 19180076 -3.5 3.5%

View table here if you experience formatting issues.

As you can see these stocks had an average of 146.5 hedge funds with bullish positions and the average amount invested in these stocks was $19180 million. That figure was $21453 million in FB’s case. Microsoft Corporation (NASDAQ:MSFT) is the most popular stock in this table. On the other hand Alibaba Group Holding Limited (NYSE:BABA) is the least popular one with only 127 bullish hedge fund positions. Compared to these stocks Facebook Inc (NASDAQ:FB) is more popular among hedge funds. Our calculations showed that these four stocks returned an average 3.5% in October and outperformed the S&P 500 ETF (SPY) by 1.6 percentage points. Facebook shares returned 8.4% in October and beat the market by 6.5 percentage points. Facebook shares also returned more than 47% year-to-date and beat the market by 25 percentage points. The next time you read an article about how hedge funds are and have been underperforming the market since 2009, remember this stat. Hedge funds have been underperforming the market because they are hedged and charge large fees. If you had invested in hedge funds’ top ideas by yourself, you could have avoided large fees and generated much better returns than the market over the last 10 years.

Disclosure: None. This article was originally published at Insider Monkey.

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