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Jonathan Angrist’s Cognios Can’t Deliver Despite Apple, Amazon, Microsoft Bets

Investing is hard. It used to be very easy. Hedge funds in the 80s and the 90s managed to return nearly 40% annually and their investors gladly paid them 2% of their assets and 20% of their profits as fees. Investors’ net returns averaged above 30% annually and hedge funds managers gradually turned into billionaires.

Investors gradually shifted their assets into hedge funds. Hedge funds’ assets under management first crossed the $1 billion mark, then the $100 billion and the trillion mark in this millennium. The demand for hedge funds created its own supply. The assets of well-known hedge funds run into tens of billions and most of them closed their doors to new investors. As a result investors handed their assets to the offshoots of these well-known hedge funds and other fund managers who were good at marketing but not very good at picking stocks.

Today, an average hedge fund can’t generate more outperformance than the rich fees it charges. They found a neat solution that works for them but not for their investors. Initially hedge funds were called hedge funds because they were hedging their net exposure. Over the last 20 years, the net exposure of hedge funds started to creep up to 30%, 40%, 50%, and 80% level. This new approach enabled them to generate single digit returns during bull markets and enrich themselves. Nowadays, there are only a few hedge funds that have near zero net market exposure.

One of these hedge funds is John Brandmeyer and Jonathan C. Angrist’s Cognios Capital. The Cognios Market Neutral Large Cap Fund takes positions in undervalued U.S. stocks and balance this long exposure by shorting overvalued U.S. stocks across different industries. Cognios Capital isn’t as greedy as other hedge funds and this market neutral strategy only charges 1.5% annually (no incentive fees). This means its investors will generate positive returns if Cognios’ long positions beat its short positions by more than 1.5 percentage points.

Cognios was successful in delivering positive returns since its inception. The Cognios Market Neutral Large Cap Fund returned 3% annually after fees. The fund returned 5.6% in 2015, -0.8% in 2016, 5% in 2017, 3.9% in 2018, -0.6% in 2019, and -2.1% during the first quarter of 2020. According to Cognios Capital’s latest 13F filing, the fund’s top 5 positions at the end of March were Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), The Procter & Gamble Company (NYSE:PG), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOGL).

These are actually great large-cap stock picks. Four of these stocks are also among the top 5 hedge fund stocks which lost an average of only 6.9% during the first quarter. If you had invested only in the top 5 hedge fund stocks and shorted the S&P 500 Index, you would have returned nearly 13% with zero net market exposure. Hedge funds’ consensus picks is a fertile area to find undervalued stocks.

Insider Monkey leaves no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the “next Amazon” in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Insider Monkey’s monthly newsletter beat the S&P 500 Index by 44 percentage points over the last 3 years. So, we are also good at picking winners like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (MSFT), The Procter & Gamble Company (PG), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOGL).

The problem with Cognios’ investment approach is that it had only $25 million invested across these 5 stocks, but it also put another $175 million into other long ideas. Cognios Capital isn’t required to disclose its short positions in U.S. stocks, so we don’t know how its short picks performed this year. However, from the losses generated by the fund it isn’t too difficult to figure out that the fund wasn’t able to generate alpha from its short positions.

It pains me to say this but Cognios Capital is an above average hedge fund. Its market neutral portfolio generates 4.5 percentage point of alpha which is very decent. Investors can scour Cognios’ top stock picks to come up with decent large cap investment ideas. Does Cognios deserve a third of the returns it generates as fees? That’s something between Cognios and its investors. I don’t like paying large fees which is why I launched Insider Monkey 10 years ago to level the playing field for small investors. You can see hedge funds’ top stock picks on our site every quarter and you don’t have to pay a dime for them.

Disclosure: No positions in Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (MSFT), The Procter & Gamble Company (PG), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOGL). This article is originally published at Insider Monkey.

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