The Insider Monkey data team is finally done processing nearly 750 13F filings and we will start sharing reports based on the aggregate hedge fund sentiment. First, let’s answer why it is important to track hedge funds’ stock moves. Most people think hedge funds don’t have any skill in picking stocks because they have been underperforming the market every year since 2008. There are two reasons for this hedge fund underperformance. First, hedge funds aren’t 100% net long whereas index funds are 100% long. An average equity hedge fund is about 50% net long. This means they will return 6% when the overall market goes up 12%. Second, hedge funds charge 2 percentage points of management fees and 20% performance fees. If their raw return is 6%, they will charge 2 percentage points of management fees and 1.2 percentage points of performance fees. Overall, their net return would have been 2.8% in this scenario. In 2014, an average equity long/short hedge fund returned around 3.2%, so they were able to generate a tiny alpha.
Our research has shown that hedge funds have tremendous skill in picking stocks but investing directly into the hedge funds isn’t the optimal way of taking advantage of this stock picking skill. For instance, investors would have outperformed the market by nearly 2 percentage points a year by investing in the 30 most popular stocks among hedge funds. In this article we will share the 10 most popular stocks. Our research has also shown that hedge funds are much better at picking small-cap stocks. Hedge funds’ most popular small-cap picks outperformed the market by double digits in our back tests. This makes sense because it is easier to gather valuable information by researching small-cap stocks, whereas the information gap is much smaller in the large-cap space.
Let’s take a look at what hedge funds have been doing recently. You can also check out last quarter’s rankings here.
1. Apple Inc. (NASDAQ:AAPL) is still the most popular stock among hedge funds. At the end of the fourth quarter 20.2% of the 737 hedge funds we track were invested in Apple Inc. This number was 22.7% at the end of the fourth quarter. So, Apple’s popularity went down but it is still the most popular stock. Carl Icahn, Philippe Laffont, and David Einhorn are still among the hedge funds with large Apple Inc. positions. However, David Tepper, George Soros, and Peter Rathjens (Arrowstreet Capital) dumped their entire stake in the tech giant.
2. Citigroup Inc (NYSE:C) went up one spot in the rankings. At the end of 2014, 18.6% of hedge funds were invested in Citigroup Inc. This number was 19.3% at the end of the previous quarter. Billionaires Andreas Halvorsen, Dan Loeb, Leon Cooperman, and Seth Klarman are among Citigroup Inc. shareholders.
3. Actavis Plc (NYSE:ACT) is the only healthcare stock that has ever broken into the top 3 most popular stock since we started publishing this list. Hedge funds collectively own more than 20% of Actavis Plc’s outstanding shares. At the end of the fourth quarter, 17.8% of hedge funds were invested in this healthcare stock. Billionaires were also extremely bullish about Actavis. Billionaires Andreas Halvorsen, Dan Loeb, Daniel Och, Larry Robbins, Barry Rosenstein, John Griffin, John Paulson, and James Dinan were among the top 10 holders.
4. American Airlines Group Inc (NASDAQ:AAL) wasn’t as popular as Actavis but still very popular for a $38 billion market cap company. James Dinan, David Tepper, Dan Loeb, and George Soros are fans of the stock. There were a total of 123 hedge funds with American Airlines positions at the end of the fourth quarter.
5. Google Inc (NASDAQ:GOOGL) tumbles from second to fifth on our list, with hedge fund ownership dropping to 16.3% from 20.2%. Despite adding more than 50 hedge funds to our database last quarter, there are 17 less funds in Google than there were at the end of the third quarter, 120 compared to 137. So though it remains a popular pick, it is also one of the stocks our funds were the most bearish on last quarter. Lee Ainslie, David Tepper and Al Gore are a few of the notable investors that are still betting on this stock.
6. Facebook Inc (NASDAQ:FB) moves all the way into sixth position, after missing out on the top ten the previous quarter. Ownership has been increased to 16% from 15.3% among our funds. Stephen Mandel boosted his stake by 56% during the quarter, while billionaires John Griffin and Stan Druckenmiller initiated brand new positions in the stock as well. However, David Tepper and Andreas Halvorsen did close large positions in Facebook during the fourth quarter.
7. American International Group Inc (NYSE:AIG) falls from fourth to seventh, losing over 2% support from our funds in the past quarter, as it fell to 15.7% from 18%. Bruce Berkowitz‘s Fairholme Capital has been particularly bullish on this stock since the filing period, adding over 24 million shares in 2015, a nearly 50% increase in his position (which he lowered during the fourth quarter). The stock continued to be a top pick of Richard Perry, Larry Robbins, and David Abrams, while Barry Rosenstein sold 5.17 million shares, nearly half of his position.
8. Microsoft Corporation (NASDAQ:MSFT): After a strong 21 month run from the beginning of 2013, some of our funds began to take profit and move out of Microsoft, as ownership slipped to 15.5% from 17.5% at the end of third quarter. Those who retreated have thus far been proven wise, as Microsoft is down a little over 6% this year. Among them are Curtis Macnguyen of Ivory Capital, Rob Citrone’s Discovery Capital, and Georgo Soros. On the other hand, Jeffrey Ubben, Boykin Curry, and Zach Schreiber remain firm supporters of Microsoft and the work being done by CEO Satya Nadella since he took over in early 2014.
9. Micron Technology, Inc. (NASDAQ:MU): Like Microsoft, a very strong run from the beginning of 2013 has left our funds cooling on Micron, as ownership dropped to 16.1% from 15.3%. Others who retained some shares, but scaled back their positions were Seth Klarman, who sold of 31.95 million shares of what was once his largest position, and David. E. Shaw, who sold off nearly half of the 16.51 million share stake he held at the end of the third quarter. David Einhorn’s Greenlight Capital on the other hand, increased its position slightly, with Micron being the fund’s top pick.
10. Allergan, Inc. (NYSE:AGN) rounds out the top ten, moving up to 15.2% fund ownership from 14.7%. Bill Ackman scored big on this stock in 2014 as it soared 82.28% from April 11 through the end of the year, and was eventually sold to the number three company on our list, Actavis, towards the end of 2014. John Paulson also scored big on both Allergan and Actavis in the second half of last year.
Disclosure: None
