The $3 trillion hedge fund industry that was once dear to almost every other investor seems to be in shambles as elite investors pull out massive money amid losses and high fee. But our research shows that tracking long positions of hedge funds is still the best way to beat the market. For example, when we look at the third-quarter returns of the hedge funds in our database which had at least 5 long positions in companies valued at $1 billion or more, we see their long picks returned 8.3% on average, a full 5.0 percentage points above S&P 500 ETFs. However, that long stock-picking prowess is often overshadowed by the hedged portion of their portfolios, in options, bonds, and short positions. We believe that investors should pay attention to hedge funds’ top picks for a chance to beat the market.
In this article, we will take a closer look at some of the bets of Richard Mcguire‘s Marcato Capital Management, one of the hedge funds whose long stakes returned positive gains in the third quarter. According to our calculations, Marcato’s 10 holdings in companies valued at over $1.0 billion had a return of 12.32% in the third quarter. The companies that we are going to discuss are The Bank of New York Mellon Corporation (NYSE:BK), Sothebys (NYSE:BID), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Signet Jewelers Ltd. (NYSE:SIG).
Marcato Capital Management unloaded 72% of its stake in The Bank of New York Mellon Corporation (NYSE:BK) during the third quarter, while the stock appreciated by 3.1% in the same period. In this way, the fund held 2.90 million shares of The Bank of New York Mellon worth $115.69 million at the end of September. At the end of June, Marcato was one of 41 funds tracked by us long The Bank of New York Mellon Corporation (NYSE:BK). Among these funds, Nelson Peltz’s Trian Partners had the number one position in The Bank of New York Mellon Corporation (NYSE:BK), worth close to $1.25 billion. The second most bullish fund was First Eagle Investment Management, which held $929.4 million worth of stock. Other funds bullish on the company included Warren Buffett’s Berkshire Hathaway and Mario Gabelli’s GAMCO Investors.
Sothebys (NYSE:BID) is another company in which Marcato trimmed its position, as the fund reported ownership of 4.67 million shares as of the end of September, down by 11% over the quarter. However, as the stock advanced by 38.8% between July and September, the value of the holding surged to $177.55 million. Sothebys (NYSE:BID) was included in the equity portfolios 16 funds from our database at the end of June, down by six funds over the quarter. Third Point, managed by Dan Loeb, held the largest position in Sothebys (NYSE:BID) at the end of June, having reported $182.5 million worth of stock. Some other peers with similar optimism included John W. Rogers’s Ariel Investments, Jeffrey Gates’s Gates Capital Management, and Steve Cohen’s Point72 Asset Management.