How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. Our research have shown that hedge funds’ most popular large-cap stock picks generated an annual alpha of about 2 percentage points. This isn’t a large enough margin to justify large hedge fund fees but it is large enough to pay attention to these picks and use this information as an input in our decision making process.
Most financial journalists aren’t much different than most political journalists. They focus on “news” that will garner the most clicks. That’s why you have probably seen dozens of articles about hedge funds’ large losses in Valeant or energy stocks this year. We compiled hedge fund positions from 800+ long/short equity hedge funds and created a giant portfolio that is valued at $1.6 trillion. We use this portfolio’s performance to track hedge funds’ performance in real-time. Through the end of February this portfolio which consists of large and small-cap stocks lost 4.7%, vs. a loss of 5.2% for the S&P 500 Total Return Index and a loss of 8.8% for the Russell 2000 Index.
These results confirm what we have uncovered in our research: following hedge funds’ large-cap stock picks gives investors a small edge whereas following hedge funds’ small-cap consensus picks gives investors a big advantage over small-cap ETFs. With this in mind, let’s take a look at the recent hedge fund activity surrounding Alphabet Inc (NASDAQ:GOOGL).
Is Alphabet Inc (NASDAQ:GOOGL) a good stock to buy? Prominent investors are getting more optimistic. The number of long hedge fund bets went up by 25 recently. In terms of absolute popularity GOOGL is the second most popular stock among hedge funs. However, since Alphabet Inc trades under two ticker symbols we can even argue that it is in fact the most popular stock because the aggregate hedge fund dollars invested in the stock is the highest among all stocks. So, why do hedge funds love Alphabet Inc so much? Let’s a take a look at RV Capital’s comments about the stock in the first half of 2016: