Best Hedge Funds in 2012

Insider Monkey looks for long/short equity hedge funds with the best stock picking ability. The reason is simple. We believe we can outperform both index funds and hedge fund investors who surrender 2% of their savings and 20% of their returns for the privilege of turning hedge fund managers into billionaires. Imitating hedge funds may have some disadvantages. We get to see hedge funds’ long positions once a quarter and that’s with a 45 day delay. It is also true that they may not even be holding those shares by the time we are buying them. However, our research has shown that this is usually an advantage. Hedge funds are early in investing in stocks and the delays in reporting benefit imitators. We follow hedge fund managers who hold on to stocks for long periods of time. We also don’t have to invest in a hedge fund manager’s 50th best idea. We can just pick the top stock picks of best hedge fund managers and may even be able to beat them in their own game. That’s what Alfred Winslow Jones, the father of the hedge fund industry, did.

During the first half of this year we calculated the value-weighted returns of 400 hedge funds and prominent investors in the 1000 largest stocks. During the third quarter we expanded our list to cover the 1500 largest stocks. We don’t have access to hedge funds’ short positions, so our calculations are based on their long stock positions that are revealed in their 13F filings. Here are the best hedge fund managers of the first three quarters of 2012.

1. Fortress Investment Group LLC (NYSE:FIG)’s stock picks returned 43.8% during the third quarter, bringing their year-to-date return to almost 70%. The fund had nearly $1.5 billion invested in Nationstar Mortgage Holdings Inc (NYSE:NSM) at the end of June. The stock was Fortress’ top position and returned 54% during the third quarter.

2. Artis Capital Management was among the top hedge funds during the second quarter. The fund’s stock picks had a weighted average return of 25.5% during the first half of the year. Artis’ large and mid-cap stock picks performed spectacularly during the third quarter as well, returning 24.6% and bringing their YTD performance to 56.4%. Artis had more than $60 million invested in Fusion-IO, Inc. (NYSE:FIO) at the end of the third quarter. The stock returned 45% during the third quarter.

3. Billionaire Eddie Lampert’s hedge fund had a terrific first half with an overall return of 32%. ESL Investments’ stock picks gained another 8% during the third quarter, bringing its YTD performance to nearly 43%. Lampert had nearly $1.7 billion invested in AutoNation, Inc. (NYSE:AN) at the end of the second quarter. The stock returned 24% during the third quarter.

Baker Bros. Advisors ranked fourth with a YTD performance of 41.43%, followed by Litespeed Management’s 41.40% return. Baker Bros had more than $600 million invested in Pharmacyclics, Inc. (NASDAQ:PCYC) and the stock gained 18% during the third quarter. Litespeed is one of the hidden gems in the hedge fund industry and one of our favorite funds. Seagate Technology PLC (NASDAQ:STX) was Jamie Zimmerman’s top stock pick at the end of the second quarter and the stock returned more than 26% during the third quarter.

You can check out other hedge funds’ performance on Insider Monkey’s hedge fund pages.