Were Hedge Funds Right About Betting On Warren Buffett?

In this article you are going to find out whether hedge funds think Berkshire Hathaway Inc. (NYSE:BRK-B) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Berkshire Hathaway Inc. (NYSE:BRK-B) the right investment to pursue these days? Even though the number of bullish hedge fund bets retreated by 8 lately, BRK-B still ranks 16th among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Berkshire Hathaway Inc. (NYSE:BRK-B) was in 107 hedge funds’ portfolios at the end of June. The all time high for this statistics is 115.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we’re going to take a peek at the fresh hedge fund action regarding Berkshire Hathaway Inc. (NYSE:BRK-B).

How are hedge funds trading Berkshire Hathaway Inc. (NYSE:BRK.B)?

At the end of June, a total of 107 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BRK-B over the last 20 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Michael Larson’s Bill & Melinda Gates Foundation Trust has the largest position in Berkshire Hathaway Inc. (NYSE:BRK.B), worth close to $7.1248 billion, accounting for 39.9% of its total 13F portfolio. Coming in second is Eagle Capital Management, managed by Boykin Curry, which holds a $1.5263 billion position; 5.6% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism contain Tom Russo’s Gardner Russo & Gardner, Ric Dillon’s Diamond Hill Capital and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Punch Card Capital allocated the biggest weight to Berkshire Hathaway Inc. (NYSE:BRK.B), around 41.15% of its 13F portfolio. Bill & Melinda Gates Foundation Trust is also relatively very bullish on the stock, setting aside 39.88 percent of its 13F equity portfolio to BRK-B.

Because Berkshire Hathaway Inc. (NYSE:BRK.B) has experienced declining sentiment from the smart money, it’s safe to say that there was a specific group of funds who were dropping their positions entirely last quarter. Intriguingly, Bill Ackman’s Pershing Square sold off the largest position of the “upper crust” of funds tracked by Insider Monkey, worth close to $997 million in stock. Allan Mecham’s fund, Arlington Value Capital, also sold off its stock, about $263.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 8 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Berkshire Hathaway Inc. (NYSE:BRK.B). We will take a look at Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), Mastercard Incorporated (NYSE:MA), The Procter & Gamble Company (NYSE:PG), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), and JPMorgan Chase & Co. (NYSE:JPM). This group of stocks’ market caps resemble BRK-B’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 101.3 hedge funds with bullish positions and the average amount invested in these stocks was $9301 million. That figure was $15634 million in BRK-B’s case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the least popular one with only 58 bullish hedge fund positions. Berkshire Hathaway Inc. (NYSE:BRK.B) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BRK-B is 68.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on BRK-B as the stock returned 18.7% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.