We launched our quarterly newsletter at the end of August 2012. The idea behind our small-cap hedge fund strategy is pretty straight forward. We identify the 15 best stock picks of the best hedge fund managers. You may think that hedge funds underperform the market by a large margin, is it really possible to identify their best ideas and avoid their worst ideas? And if it is possible to identify their best ideas in advance, why don’t hedge funds themselves invest only in their best ideas?
Let’s first try to answer the first question. We really think that it is possible to identify hedge funds’ best ideas. Our research director Ian Dogan, who has a Ph.D. in financial economics, developed a proprietary algorithm that does this. His back-tests have shown that his strategy outperformed the market by double digits between 1999 and 2012.
Our actual results were much better than our back-tested results.
Insider Monkey’s small-cap hedge fund strategy returned 14.6% in 2012, vs. 2.1% gain for SPY and 5.3% gain for IWM.
In its second year, and its first full year, Insider Monkey’s small-cap hedge fund strategy returned 53.2%, vs. 32.3% gain for SPY and 38.7% gain for IWM.
This year, through December 30th, our small-cap hedge fund strategy returned 28.6%, vs. 14.6% gain for SPY and 5.3% gain for IWM.
Our cumulative return since the end of August 2012 is 125.8%, vs. 54.9% for SPY and 53.7% for IWM.
The 15 best ideas of the best hedge fund managers managed to outperform the market by 70.9 percentage points in 28 months. We feel pretty confident that our proprietary strategy can identify hedge funds’ best ideas. Our picks outperformed the market by double digits in back tests as well as in real time.
Let’s try to answer the second question. A hedge fund manager obviously knows his best ideas which are usually 2-3 ideas per year. He/she can’t invest all of his capital on 2-3 ideas. A sharp decline in one of these stocks means the end of the game for this hedge fund manager. Investors usually yank their capital at the first sign of trouble.
Hedge fund managers don’t have access to our proprietary investment strategy. They know what their best ideas are but they don’t know what the best ideas of other hedge fund managers. That’s why they fill up the rest of their portfolio with mediocre ideas.
We don’t worry about occasional sharp declines in the market. Our picks generated enough alpha to compensate our subscribers for being 100% long. Passive index investors have been sheepishly investing in SPY or IWM and returned 54.9% or less in the past 28 months. Our subscribers more than doubled this.
You can read the details about our strategy on this page. You can also download a sample issue.