10 Largest Hedge Funds in The World And Their Favorite Stock Picks

Which are the largest hedge funds in the world? Most investors see hedge fund size as an indication of investment success. It is partially true though it is true that these hedge funds are extremely successful in attracting assets because of their marketing skills. Hedge funds have been having a tough time of late with passive investing strategies gaining favor with investors. Poor performance and high fees have seen investors pull out almost $51 billion from the hedge fund industry by October 2016 making it the worst year since 2009. While the overall industry has been facing pressure, many of the biggest hedge funds globally continue to perform well and have in fact increased their assets under management.

One common characteristic of the biggest hedge funds in the world is that they had higher returns when they were much smaller. Most large hedge fund managers wouldn’t acknowledge the fact that there is a negative relationship between fund size and fund returns. Our empirical analysis clearly shows that hedge funds in general generate more outperformance in the small-cap stocks than large-cap stocks. However, if you have $30 billion in assets and borrow another $30 billion to $60 billion from your prime broker to magnify your returns, you won’t find enough small-cap ideas to deploy all of this cash. Think about it. If you buy 5% of a billion dollar company, you need 1800 companies to deploy $90 billion. So, all large hedge funds experience a style drift towards large-cap stocks.

In the article below, we look at the world’s biggest hedge fund firms by AUM and also list out some of their favorite stocks. You will see that all of the top picks of these largest hedge funds are large cap stocks like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN). We also came across two surprising stock picks by the largest hedge funds. We will reveal the names of these stocks later in the article.

Before revealing the names and top stock picks of the largest hedge funds in the world, I’d like to talk about something that boggles my mind the most about institutional investors such as pension funds. Most of these are managed by underpaid people whose main concern is to keep their jobs by doing what everybody else is doing. After all nobody ever got fired for choosing IBM. Principals of pension funds know that by giving their money to the largest, most established hedge funds they aren’t risking their jobs in the event that these hedge funds underperform. On the other hand, if they do the unconventional thing and invest in smaller hedge funds (which are hungrier and actually deliver higher average risk adjusted returns), they may lose their jobs. We already know how this story plays out. Large hedge funds are good at picking large cap stocks but not good enough to generate extra returns to make up for their huge fees.

So, keep in mind that the hedge funds and stocks you will encounter in this article will be large and decent hedge funds and stocks. However, they aren’t the best hedge funds or stocks to invest in. When you check out the list of last quarter’s best performing hedge funds, you will notice that only a few of them are very large hedge funds and none of them are among the 10 largest hedge funds in the world. Anyway, the rundown of the biggest hedge funds begins on the next page:

10. Lone Pine Capital (AUM: Almost $30 billion)

With great stock picking skills, Stephen Mandel’s Lone Pine Capital finds a place amongst world’s largest hedge funds of 2016. The fund follows a bottom up methodology for investing and the manager uses his judgement alone to decide the time for entry or exit into a particular stock. Starting with just $8 million, the fund has outperformed S&P index by double digits since inception though its outperformance margin shrunk in recent years. It employs a long/short hedge fund investing style in public equity markets across the globe.

Lone Pine Capital has a noticeable $1.1 billion investment in Amazon.com, Inc. (NASDAQ:AMZN) which is a favorite of most of the hedge funds we discuss in this article. Another top 10 position for Lone Pine is Microsoft Corporation (NASDAQ:MSFT) which has also become quite popular amongst the biggest hedge funds globally and accounts for 3.76% of the Lone Pine Capital’s portfolio. Microsoft Corporation (NASDAQ:MSFT) has done extremely well under the leadership of Satya Nadella successfully expanding into new areas such as cloud computing and shedding loss making businesses such as smartphones.

9. Viking Global Investors (AUM: $33 billion) is a long/short global equity fund with a bottom-up stock picking approach and ranks number 9 amongst the top ten largest hedge funds globally. The fund which was started by three former Tiger colleagues is now down to one Andreas Halvorsen. This Connecticut based large hedge fund has $33 billion in assets under management now. Viking Global returned 16.3% annually since 1999. However, we said earlier, it was more successful in its early years. It returned 84.3% in 2000 and 35% in 2001. S&P 500 Index lost 9.1% in 2000 and 11.9% in 2001.

More recently Viking Global managed to deliver an annualized return of 12.9% over the last 10 years, vs. 7.2% gain for the S&P 500 Index. You should keep in mind that Viking Global is a long/short fund with much smaller risk and volatility than the S&P 500 Index which is 100% long. Long/short funds perform much better in down markets. Most investors fail to understand this. For example, S&P 500 Index lost 37% in 2008 whereas Viking Global lost only 0.9%.

Currently the fund is positively inclined towards the technology sector and has all four constituents of the “FANG” group in its portfolio. Amazon.com, Inc. (NASDAQ:AMZN) was Viking Global Investors’ biggest position constituting more than 10% of its 13F portfolio. It sold off its entire position in the trouble-making stock Valeant Pharmaceuticals during the first quarter of this year.

8. Millennium Management (AUM: $34 billion) ranks eighth amongst the top hedge fund companies by AUM globally in 2016. It was founded by the legendary investor Israel Englander. The fund posted a compounded annual return of 12.8% between 2012 and 2015, at a time when most of the other hedge funds had been under performing. Millennium is a multi strategy hedge fund. Some of the investment strategies employed by the fund are event driven strategies and merger and statistical arbitrage.

The world’s largest consumer goods maker Procter & Gamble Co. (NYSE:PG) is a big favorite amongst the world’s largest hedge funds. This company was the biggest position of Millennium Management during the third quarter and also the third largest position of AQR Capital Management. Millennium had $6.5 billion invested in PG’s shares and $2.5 billion equivalent in PG put options to hedge some of the risk. This is an enormous bet even for a $34 billion fund. Procter & Gamble Co. (NYSE:PG) has successfully implemented a complex restructuring and cost cutting exercise recently which has helped it gain margins.

Millennium Management doubled its Apple Inc. (AAPL) position and also became extremely bullish on the Danish healthcare company Novo Nordisk A/S (ADR) (NYSE:NVO) and bought 1.36 million shares taking its overall holding to $63.8 million.

7. Renaissance Technologies (AUM: $36 billion) is not only one the largest hedge funds in the world but also one of the best performing ones. It was successful in attracting $7 billion in new funds from investors, even as its peers bled cash in the past year. RenTech’s Medallion Fund is a legend in the investment world. Medallion Fund is more profitable than other billionaire funds and has delivered $55 billion in profit over the last three decades.

When you have a such a cash cow, you wouldn’t want to share the milk with anyone else. That’s what Renaissance has been doing in this century. The Medallion Fund, known as the “biggest money-making machine”, is only open to RenTech’s employees. Renaissance also has a long-term institutional equities fund that makes large bets in publicly traded stocks. Its largest bet at the moment is a surprising healthcare stock.

Novo Nordisk A/S (ADR) (NYSE:NVO) was the No.1 holding for Renaissance Technologies which was the third largest buyer of this stock during the third quarter. The stock price has been under pressure falling by 23% as drug prices have come under regulatory scrutiny in USA. However, the long term potential of Novo Nordisk A/S (ADR)(NYSE:NVO) continues to remain strong as the world’s largest insulin maker will benefit from the growing per capita income in emerging markets in India. Microsoft Corporation (NASDAQ:MSFT) was the eighth largest position of Renaissance Technologies which is also favored by the other largest hedge funds in the world.

6. Two Sigma (AUM:$37 billion) is one of the largest quant funds in the world. It was co- founded by David Siegel who has a Ph.D. in computer science from the Massachusetts Institute of Technology. At a conference in May, the quant hedge fund pioneer expressed his concern about machines taking over global workforce. He also commented that Artificial Intelligence lacks common sense at Bloomberg Markets Most Influential Summit.

Two Sigma Advisers was highly bullish on Amazon.com, Inc. (NASDAQ:AMZN) with the stock being  the largest position in its portfolio. The fund held $298 million worth of shares in Amazon.com, Inc. (NASDAQ:AMZN) during the quarter ending September. Two Sigma Advisers also added to its position in Novo Nordisk A/S (ADR) (NYSE:NVO) by purchasing 277,820 shares of this company. The company should benefit from the increasing number of diabetics who will look to buy diabetes products as their incomes rise.

5. Och-Ziff Capital Management (AUM: $37.1 billion) is number 5 amongst one of the world’s biggest hedge funds. It was founded by Daniel S Och in 1994 and it is currently structured as a publicly-traded company. It is one of the few publicly listed hedge fund companies. It held its IPO in 2007. The fund is facing rough times currently after it settled federal charges relating to violations of the FCPA Act. This hedge fund has seen its assets under management fall to $37 billion from a peak of $48 billion reached in 2015. This has made the firm cut its average management fee to 1.01% from 1.27% earlier during the year. Despite the troubles, Och-Ziff Capital Management remains one of the world’s largest hedge funds and its real estate and credit funds have remained unaffected by the current turmoil.

The fund bought 24.4 million share equivalent of Procter & Gamble Co. (NYSE:PG) call options valued at $2.2 billion during the third quarter making it the top position with 12.6% of the fund’s total portfolio value. Microsoft Corp (NASDAQ:MSFT) was its second largest position.

4. D.E. Shaw & Co (AUM: $40 billion) is another large hedge fund employing a mix of quantitative and qualitative strategies towards investing. This New York based investment management firm was founded by David E. Shaw in 1988. Recently the fund expressed interest in becoming the operating sponsor of the renewable energy yieldco Terraform Power Inc.

Amazon.com, Inc. (NASDAQ:AMZN) was the largest holding of D.E. Shaw with a total holding size of $905 million. Amazon.com, Inc. (NASDAQ:AMZN) has rewarded investors with a stunning 300% return over the last 5 years and there is promise for more as it continue to steal market share from brick and mortar retailers. D.E. Shaw also increased its position in Apple Inc. (NASDAQ:AAPL) sharply to 1.33% of its portfolio value in the third quarter up from just 0.42% by purchasing 4.3 million shares. This made it the second largest holding of D.E. Shaw.

3. Man Group (AUM: $45 billion) is the third largest hedge fund globally with $80.7 billion total assets under management. However, some of its AUM is in long-only funds and its AUM in alternative investments total about $45 billion. The fund has been gradually expanding with recent acquisitions. According to their site these are main funds: “Man AHL is a diversified quantitative investment manager that has been a pioneer in the application of systematic trading since 1987”, “Man Numeric, established in 1989 and acquired by Man Group in 2014, is a Boston-based, quantitative equity manager invested in almost every equity market in the world”, “Man GLG, founded in 1995 and acquired by Man Group in 2010, is a discretionary fund manager that is active across alternative and long-only strategies, equity and credit”, and “Man FRM, founded in 1991 and acquired by Man Group in 2012, is a hedge fund investment specialist which draws on its technological capabilities in seeking to deliver enhanced investment solutions for clients.”

In a publication last month, the fund said that they are hopeful that 2017 should be a better year than the current one, driven by “normal levels of bond yields and increased breadth of market drivers”. GLG Partners still file quarterly 13F filings with the SEC and based on these filings we noticed a brand new top 10 position in Procter & Gamble in GLG’s portfolio.

2. Bridgewater Associates (AUM: $150 billion) has grown in recent years to become the world’s second largest hedge fund. Actually it used to be number one and several websites still call it the world’s largest hedge fund. The fund focuses on economic trends and has a global macro investing style. It tries to generate alpha by investing in 15 uncorrelated strategies that are expected to generate positive alpha. This way it is usually able to generate alpha on a relatively consistent basis.

Ray Dalio, the founder of this fund thinks that the new Trump administration will have major impact on the economy, and markets and policies will be broadly positive for the US economy. The world’s second largest fund has successfully increased its assets under management in the last ten years dramatically and currently manages assets worth $150 billion. It doesn’t allocate a large portion of its portfolio to equities. Bridgewater Associates has the largest sector allocation towards the financial sector. Apple Inc. (NASDAQ:AAPL) is the second largest holding of this second largest hedge fund in the world. The fund holds a positive view on this stock as it more than doubled its position size during the third quarter. While the stock has under-performed the market over the last one year, its valuation remains cheap and it give a good dividend yield of 2%.

1. AQR Capital Management (AUM: $172 billion) is the world’s largest hedge fund and one of the most successful quant hedge funds today with an AUM of $172 billion. The fund recently announced its plan to expand its headquarters in Connecticut and create  600 new jobs. Applied Quantitative Research or AQR Capital Management employs different investment strategies including convertible arbitrage and event-driven strategies. AQR’s long/short equity fund returned 15.45% annually since its inception in July 2013. Its equity market neutral fund returned 13% annually since its inception two years ago. How was it able to generate these decent recents? Well, let’s take a look at its top 3 positions which are also among the consensus picks of other big hedge funds.

Microsoft Corporation (NASDAQ:MSFT) is the largest holding of the planet’s biggest fund with a total value of $812 million. The bullish view of the fund is due to the Microsoft Corporation’s (NASDAQ:MSFT) globally recognised strong brand, massive competitive advantages and growth potential from fast growing new areas such as Big Data. Apple Inc.(NASDAQ:AAPL) is the second largest position in AQR’s portfolio with a total value of $728 million. Finally the third largest bet in Cliff Asness’ long book is Procter & Gamble with a total investment of $675 million, up 24% during the third quarter.

It is a good practice to follow the stock picks of the biggest hedge funds, but these aren’t the best hedge fund managers. The top mid-cap stock picks of the best performing hedge funds actually outperformed the S&P 500 Index by double digits in the last 12 months. Some of these best performing funds will join the ranks of the largest hedge funds in the world and start directing their attention to more liquid but less promising large cap stocks.