Quantitative investing is gaining more and more ground amid strong results that keeps convincing investors to switch away from traditional hedge funds that use human research and sometimes rely on intuition. As algorithmic investment is becoming more and more complex helped by the advancement of artificial intelligence, it is gaining more fans and the total value of assets controlled by quantitative strategies has grown by 15% per year to around $1.5 trillion, according to Morgan Stanley cited by Financial Times.
A big part of the total value of assets invested in quant strategies goes towards exchange traded funds, which offer many advantages for smaller investors, such as opportunities to diversify not just across different industries/sectors, but also gives them exposure to quant investors. However, in combination with the overall growth of money piled into ETFs and the fact that markets remain complex systems with a lot of unpredictability, it could potentially have a huge downside. For some time some money managers have been warning that ETFs could be a destructive force in a downturn.
Then there are quantitative hedge funds, which though take a smaller share of the money put into quant strategies (around $500 billion), have also seen a huge increase in popularity. For example, Two Sigma Advisors, which is led by John Overdeck and David Siegel, saw its assets surge from just $6 billion in 2011 to over $50 billion last year. This puts it at the top of the list alongside legends like Jim Simons‘ Renaissance Technologies and David Shaw‘s D.E. Shaw.
The increase in popularity of quantitative funds has its downsides. For one, an increase in invested capital led to a decline in performance. In addition, because people are starting to notice funds that use complex statistical models and use algorithms to trade securities, there are many new funds that spawned on the market, not all of which are successful. Many quant funds rely on trend-following and their performance suffers amid market volatility and slowdown in momentum. However, this also put aside bigger and more established quant funds like Renaissance Technologies, whose Renaissance Institutional Equities LP fund gained 10.5% in the first five months of 2017, according to the Wall Street Journal.
However, despite their strong performance, following quant hedge funds can be tricky. They have huge portfolios with hundreds of positions and are basically impossible to replicate by smaller investors. Nonetheless, there is a way to take advantage of quants’ stock picking skills, which is to combine their sentiment towards stocks. Following hedge funds is a useful approach, because it allows smaller investors to benefit from the skills and expertise of large investors without having to pay these funds an arm and a leg. And while following and imitating individual hedge funds can be risky, at Insider Monkey we have determined that a better way to generate alpha is to follow multiple hedge funds and focus on stocks that they are collectively bullish on. Based on extensive research, Insider Monkey has developed its flagship strategy that focuses on the best stocks with market caps between $1.0 billion and $10.0 billion that best-performing hedge funds are collectively bullish on. Overall, since May 2014, our flagship strategy has returned more than 84%, beating the S&P 500 ETF (SPY) by more than 30 percentage points. Earlier this month, we have released the latest picks from our strategy and you can access them by subscribing to our premium newsletters via this link.
To identify the stocks that top quant hedge funds are collectively bullish on, we have selected five funds: Renaissance Technologies, D.E. Shaw & Co., Two Sigma Advisors, AQR Capital Management, and Millennium Management, which are pure quant funds and rank among the largest in the world in terms of assets. To make things more interesting, we have focused on those stocks that are in Warren Buffett‘s Berkshire Hathaway’s equity portfolio. This allows us to combine the trend-following and complexity of quant funds with the slightly conservative and value-oriented approach of Warren Buffett.
Let’s start with U.S. Bancorp (NYSE:USB), which represents the seventh-largest holding in Berkshire Hathaway’s equity portfolio. During the first quarter, Warren Buffett’s fund inched up its position in U.S. Bancorp (NYSE:USB) by 4% to 90.85 million shares valued at $4.59 billion. All five of the quant funds we picked also held shares of the company, the largest stake belonging to Cliff Asness’ AQR Capital Management, which held 5.35 million shares, worth $270.32 million. It is followed by Two Sigma Advisors and Millennium Management, which amassed 2.50 million shares and 2.43 million shares, respectively. Then there’s D.E. Shaw & Co. with 1.21 million shares and Renaissance Technologies, which added U.S. Bancorp (NYSE:USB) during the first quarter, having amassed 840,700 shares at the end of March.
The Coca-Cola Co (NYSE:KO) is one of the oldest and largest investments of Warren Buffett, with Berkshire owning 400 million shares valued at $17.37 billion. Quant investors also like The Coca-Cola Co (NYSE:KO), with D.E. Shaw boosting its position by 37% to 3.35 million shares worth $145.47 million during the first quarter. On the other hand, AQR Capital Management and Millennium Management reduced their exposure to the stock by 10% and 34%, respectively, to 2.86 million shares and 2.61 million shares, while Two Sigma Advisors added 2.56 million shares to its position, taking it to 2.57 million shares. On the other hand, Renaissance Technologies didn’t report holding shares of The Coca-Cola Co (NYSE:KO) in its last 13F filing.
Then there’s Bank of America Corp (NYSE:BAC), in which Berkshire Hathaway holds a $20.36 billion stake that contains 679 million shares. Renaissance Technologies doesn’t own shares of Bank of America Corp (NYSE:BAC), while among the other three quants, Israel Englander’s Millennium Management is the largest shareholder with 10.83 million shares, down by 13% on the quarter. On the other hand, D.E. Shaw & Co. raised its exposure to Bank of America Corp by 14% to 7.82 million shares between January and March. AQR Capital Management trimmed its stake by 8% to 5.26 million shares, while Two Sigma Advisors slashed its position by 98% and disclosed ownership of just 55,290 shares.
Wells Fargo & Co (NYSE:WFC) is Berkshire Hathaway’s second-largest holding, as the fund holds a $23.93 billion position that contains 456.51 million shares. Renaissance Technologies initiated a position that contains 3.36 million shares during the first quarter, while Two Sigma Advisors increased its stake in Wells Fargo & Co (NYSE:WFC) sixfold to 2.53 million shares and D.E. Shaw added 1.22 million shares to its holding, taking it to 3.73 million shares. On the other hand, AQR Capital Management reduced its stake in Wells Fargo & Co (NYSE:WFC) by 52% to 2.65 million shares during the first three months of 2018.
Apple Inc. (NASDAQ:AAPL) is a star in Berkshire Hathaway’s equity portfolio as Warren Buffett’s fund has been increasing its exposure to the company ever since it initiated a stake in the first quarter of 2018. At the end of March, Apple Inc. (NASDAQ:AAPL) was Berkshire’s top position, valued at 40.19 billion, having been increased by 44% to 239.57 million shares over the quarter. Other quants also hold substantial positions in Apple Inc. (NASDAQ:AAPL). AQR Capital Management inched up its stake by 1% to 7.75 million shares (worth $1.30 billion), while D.E. Shaw & Co. increased its holding by 3% to 5.61 million shares. Millennium Management increased its position the most, by 73%, but holds the smallest stake of just 1.09 million shares. Finally, Two Sigma Advisors exited Apple Inc. (NASDAQ:AAPL) during the first quarter, having sold 44,285 shares, while Jim Simons’ fund has held shares for short periods of time in the last couple of years and last reported ownership of Apple Inc. (NASDAQ:AAPL) shares in its 13F for the second quarter of 2017.