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Should You Be Concerned About Billionaire Leon Cooperman’s Top Holdings?

Earlier today, CNBC reported that Leon Cooperman‘s hedge fund has been subpoenaed by the U.S. Attorney’s Office in New Jersey as well as by the SEC. “In the letter, Cooperman says the investigation is in very early stages and that the firm is cooperating fully. The subpoenas seek information on the trading of certain securities,” CNBC reported.

Cooperman also told the following to CNBC’s Scott Wapner:

“We are cooperating fully with the government’s request for information. There have not been any allegations of any wrongdoing at Omega. We have conducted ourselves properly at all times and are confident that when the government completes its review it will come to the same conclusion.”

OMEGA ADVISORS

Here are the largest positions in Cooperman’s portfolio at the end of 2014 and their performance today:

Stock Value Today's Return
Actavis plc (NYSE:ACT) $243 million 0.23%
Citigroup Inc (NYSE:C) $230 million -0.37%
American International Group Inc (NYSE:AIG) $225 million -0.64%
Navient Corp (NASDAQ:NAVI) $207 million -0.84%
Sirius XM Holdings Inc.(NASDAQ:SIRI) $202 million 0.78%

We haven’t detected any significant moves in any of these stocks. Most of these are large-cap stocks, except for Navient Corp (NASDAQ:NAVI). Our research has shown that hedge funds’ most popular large-cap stock picks historically underperformed the market by an average of 7 basis points per month. On the other hand, hedge funds’ top 15 small-cap picks managed to beat the market by nearly a percentage point per month between 1999 and 2012 (read the details here). We believe hedge funds manage too much money and as a result of that they are forced to invest in large-cap stocks which fail to generate any meaningful outperformance.

Leon Cooperman’s large-cap stock picks aren’t an exception. Between 1999 and 2012 the large-cap stocks in Cooperman’s 13F portfolio demonstrated an average monthly return of 6 basis points vs. 32 basis points for the S&P 500 Total Return Index. These stocks are relatively larger and less risky than an average S&P 500 constituent. As a result, Cooperman’s large-cap picks generated a monthly alpha of 5 basis points during this 14-year period. Nevertheless, we don’t think it is a good idea to follow Cooperman into Actavis plc (NYSE:ACT), Citigroup Inc (NYSE:C), American International Group Inc (NYSE:AIG), or Sirius XM Holdings Inc. (NASDAQ:SIRI), based on the results of our back tests. Cooperman’s top 5 large-cap picks actually performed worse than his other large-cap picks during this period. They lost an average of 7 basis points per month and underperformed the S&P 500 Index by an average of nearly 5 percentage points per year.

We don’t think hedge funds have an edge over other institutional investors such as mutual funds or retail investors who pretty much blindly invest in the stock market. Large-cap stocks are extensively covered by analysts and risk profiles are well understood by the market participants. What does Leon Cooperman know about Actavis plc, Citigroup Inc, or American International Group Inc that other investors don’t know or misunderstand? We report on these positions but we don’t take Cooperman’s moves seriously.

On the other hand smaller stocks aren’t well followed and are sometimes misunderstood by market participants. For instance an equal weighted portfolio of Cooperman’s mid-cap picks (stocks that have market caps between $5 billion and $10 billion) managed to outperform the S&P 500 Total Return index by an average of 10 basis points per month between 1999 and 2012. Navient Corp (NASDAQ:NAVI) fits this description. Navient also counts Venor Capital, Zenit Asset Management, and D E Shaw among its investors. If you are planning to scour Cooperman’s portfolio for good investment ideas you should start looking into his smaller cap picks.

Disclosure: Long C.

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