“I have given up on stock selection,” one of my readers emailed me recently. This is the common sentiment among most small-cap and value investors. The Russell 2000 ETF (IWM) returned only 7.2% since June 2015, vs. 52.9% gain for the S&P 500 ETF (SPY). Billionaire hedge fund manager David Einhorn summed it neatly in his fund’s 2020 Q1 investor letter:
“We continue to note the headwinds to value stocks and tailwind to growth stocks. To our chagrin, growth outperformed value by an extraordinarily wide margin during the quarter (the Russell 1000 Pure Growth Total Return index (“Pure Growth”) returned -13.6% while the Russell 1000 Pure Value Total Return index (“Pure Value”) returned -35.0%), explaining a good portion of our difficulty. Through April, Pure Growth has recovered more than all of its decline and is now up 2.7%, while Pure Value remains down 25.8%. This has been a multi-year phenomena and we have not acquitted ourselves well fighting it. Over the last five years, Pure Growth has more than doubled, while Pure Value is essentially flat. “
Traditional value hedge funds are suffering but there are tons of other hedge funds that are thriving in this market. We have been sharing the list of 30 most popular stocks among hedge funds here at Insider Monkey for the past year. Actually the majority of these stocks aren’t traditional value stocks. Last quarter we shared hedge funds’ top 30 stock picks at the end of 2019. Hedge funds’ top 20 stocks outperformed the S&P 500 Index by 4.3 percentage points during the first quarter.
Six months ago we listed hedge funds’ top 30 stock picks at the end of the third quarter of 2019. While the S&P 500 ETFs returned around 9.0% during the fourth quarter, hedge funds’ top 20 stock picks crushed the market with a 13.5% gain. Overall, hedge funds’ top 20 stock picks returned 41.3% in 2019 and beat the market by 10.1 percentage points.
More than half of all investors invest in dumb index funds because they were made to believe that they can’t outperform the market by stock selection. I am going to share with you a very simple investment strategy that outperformed the dumb S&P 500 Index ETF (SPY) by 81 percentage points since 2015.
This simple strategy’s 5 stock picks returned 58% between 2015 and 2018, vs. SPY’s 32% gain during the same period.
This simple strategy’s 5 stock picks also returned 51% since the end of 2018, vs. SPY’s 17% gain.
This simple strategy’s 5 stock picks thrived in this coronavirus crash returning 12% through May 19th, vs. nearly 9% loss for the S&P 500 ETF (SPY).
This is why we call index fund investing “dumb”.
The simple strategy I am talking about is hedge funds’ top 5 stock picks.
Every quarter we process more than 800 hedge funds’ 13F filing and identify the top stocks among ALL 800+ hedge funds. The list of top 5 hedge fund stocks hasn’t changed since the third quarter of 2018. If you had invested in this low turnover simple strategy at the beginning of 2015, you would have outperformed the S&P 500 ETFs by more than 81 percentage points.
Hedge funds knew these 5 stocks are the “best” 5 stocks to buy and they were piling into these stocks.
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Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. We launched our monthly newsletter’s activist strategy 3 years ago and this strategy’s picks returned 72% in 3 years and beat the SPY by 44 percentage points. Our short strategy was also launched 3 years ago and its short recommendations lost a cumulative 39% (that’s a good thing because we are shorting them) since then. You can improve your returns by subscribing to our premium newsletters.
Nowadays most investors believe that hedge funds lost their “magic touch” a long time ago and can’t beat the market. Don’t trust the returns reported by hedge fund indices. Hedge funds underperform because they hedge and they charge an arm and a leg for their services. If you want to compare apples to apples, you need to take a look at the performance of most popular hedge fund stocks vs. the returns of the S&P 500 Index. Apple, Google, Microsoft, Facebook, and Amazon have consistently been among the top 3 hedge fund picks over the last 7 years since we started publishing our quarterly newsletter. You don’t have to be a math wizard to calculate the mind numbing returns of these technology stocks some of which now trade around $1 trillion valuation.
The best thing about following hedge funds’ top picks on our website is that you don’t need to pay them an annual 2% fee and 20% of your profits to beat the market. We do that here free of charge using the holdings data from the legally required SEC portfolio disclosures. Our approach is also superior to investing directly into hedge funds because we don’t like to invest in a hedge funds’ 35th best idea when we can invest in only the best stock picks of the best hedge funds.
Below we listed the 30 most popular stocks among hedge funds at the end of March (you can also watch our video at the end of this article covering the top 5 hedge fund stocks). If you are only interested in large-cap stocks, check out the top 20 stocks in this list below:
30. HCA Healthcare Inc (NYSE:HCA): $104
Number of Hedge Funds: 87
Total Dollar Amount of Long Hedge Fund Positions:$2.2 billion
Percent of Hedge Funds with Long Positions: 10.6%
Second Quarter Return (through May 19th): 15.6%
Popularity Ranking (Q4): 76
Noteworthy Hedge Fund Shareholders: Michael Castor (watch the video below to understand why HCA is Michael Castor’s favorite hospital stock)
