It’s important to follow the stocks hedge funds are crazy about, even though hedge funds might be overlooked by many investors, given their weak aggregate performance in the last couple of years. With the stock market at all-time highs and hitting new records almost every week, the need for returns and capital preservation and long-term gains, investors don’t seem to require the sophisticated and enhanced strategies that hedge funds rely on, and which have worked very well in the past. However, it’s foolish to assume that the current market conditions are going to persist over the long run, hence hedge funds shouldn’t be thrown out of the equation.
There are different ways in which hedge funds represent a good alternative investment. Some hedge funds, especially big players, still focus on capital preservation, so they offer downside protection, even if they underperform the market. On the other hand, smaller hedge funds are more flexible, so they can provide alpha through focusing on narrower strategies that involve sector or geographic expertise. In addition, hedge funds offer one of the most important keys to a solid portfolio: diversification. Diversification works best when there is little or no correlation between assets, so it’s a good idea to pick hedge funds that don’t correlate with the stock market.
However, despite their advantages, hedge funds also charge an arm and a leg, which not always can outstrip the benefits they provide. In addition, hedge funds have very high investment requirements, which makes them unavailable for smaller investors. This is why it’s important to follow hedge funds’ investments that they disclose publicly in their 13F filings. While this approach is not perfect and only offers a glimpse at one of many strategies that hedge funds employ, it can still be useful, as we discovered through extensive research and analysis of hedge funds’ 13F filings.
At Insider Monkey, we follow around 700 hedge funds and other institutional investors and every quarter we compile data based on their 13F filings to identify their collective sentiment towards hundreds of stocks. This approach allows us to identify stocks that are the best suited to generate market-beating returns, as we focus on particular groups of stocks, such as small and mid-cap stocks, which we share with our premium subscribers. Our strategy that focuses on best stock picks of best performing hedge funds returned 67.4% since its inception in May 2014 and beat the S&P 500 ETF (SPY) by over 20 percentage points (see more details here). In addition, we have a monthly newsletter that focuses on activist funds and identifies their best picks to imitate that hedge fund (see more details).
As we compiled the data from the third-quarter round of 13F filings, we have identified the stocks that hedge funds are collectively most bullish on. Unsurprisingly, most of these stocks are from the tech space, with seven of the top 10 most popular stocks being from this sector, with other two being financial stocks. The tech stocks that hedge funds are most bullish on are big names like Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN). One of the reasons for this is while the tech sector has experienced substantial growth (the S&P 500 Information Technology Index is up by 36% year-to-date), many still find these stocks undervalued. Julian Robertson mentioned this at the Delivering Alpha Conference and said that right now growth companies like Apple Inc (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) “are priced cheaper than they would have ever been in the ’60s, ’70s, and ’80s.”
Having said that, let’s take a look at five stocks hedge funds are crazy about. The stocks in question not only rank among the most popular, but have also seen a big jump in popularity between July and September.