We started telling our premium subscribers to short the market at the end of March when the S&P 500 Index was trading near the 4600 level. The market hasn’t been kind to hedge fund darlings this year. This is a pattern we have been observing for the last 7-8 years as nimble hedge funds dump their holdings to reduce their exposure when the markets get choppy whereas mega hedge funds act slower and get punished during the process. This doesn’t mean that we shouldn’t track what hedge funds are doing during bear markets.
Hedge funds, in general, underperform the market during bull markets and outperform during bear markets. Most investors don’t understand that hedge funds are “hedged”. When the S&P 500 Index returns 20+% like it did in 2021, it is a certainty that hedge funds will underperform. It is also a certainty that hedge funds will significantly outperform the market when the market declines 15% like it did this year. Hedge funds probably lost 8-9% this year through the end of May. That’s an outperformance of 5+ percentage points, but it isn’t comforting. When the markets are up, the financial media complains that hedge funds underperform. When the markets are down, the financial media complains that hedge funds didn’t protect their investors from losses. We don’t pay attention to what an “average” hedge fund delivers because their returns are distorted for two reasons. First, they charge an arm and a leg for stock picks that are publicly available with a 45-day delay. Second, they hedge but they don’t generate much alpha on the short side. Instead of tracking hedge fund returns, we track the returns of the most popular hedge fund stocks.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this strategy has helped us beat the market on average over the last several years. For instance, between March 2017 and April 2022 our monthly newsletter’s stock picks returned 159.9%, vs. 89.8% for the SPY. Our stock picks outperformed the market by 70 percentage points. We share these stock picks only with our premium subscribers.
We don’t talk much about our monthly newsletter’s stock picks publicly, but we have been sharing the list of 30 most popular stocks among hedge funds here at Insider Monkey since the end of 2018. The majority of these stocks aren’t traditional value stocks. You can check out our three previous articles about the 30 most popular hedge fund stocks at the end of 2021, 2021 Q3 and 2021 Q2 here. In May 2021, we shared hedge funds’ top 30 stock picks for 2021 Q1. In February 2021, we also shared hedge funds’ top 30 stock picks. A year ago, we also shared hedge funds’ top 30 stock picks at the end of November 2020. Three months before that we shared hedge funds’ top 30 stock picks for Q2’20.
This quarter’s top 30 stocks lost 17% through the end of May and underperformed the S&P 500 Index by 7 percentage points, while the top 5 stocks lost 19.2%, versus a 10.0% loss for SPY during the same period.
Overall, hedge funds’ top 5 stock picks returned 29.6% in 2021 and beat the market by 3.6 percentage points. From 2014 through the end of 2021, these 5 stocks returned 324.5% and beat the S&P 500 Index by 131 percentage points. So, this year the S&P 500 Index started to close the performance gap, but we believe this is just a temporary blip and when the bull market resumes, hedge funds’ top stock picks will resume their historical trajectory of strong outperformance.
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 (or they are forced to invest in index funds in their companies’ retirement accounts). I am going to share with you a very simple investment strategy that outperformed the dumb S&P 500 Index ETF (SPY) by 114 percentage points between 2014 and 2021.
This simple strategy’s 10 stock picks returned 74% between 2015 and 2018, versus SPY’s 32% gain during the same period.
This simple strategy’s 10 stock picks also returned nearly 91% in 2019 and 2020, vs. SPY’s 55.3% gain.
This simple strategy’s 10 stock picks generated an annualized return of 19.2% over the 8-year period between 2014 and 2021.
This is why we call index fund investing “dumb”.
The simple strategy I am talking about is hedge funds’ top 10 stock picks.
Every quarter we process more than 900 hedge funds’ 13F filings and identify the top stocks among ALL 900+ hedge funds. The list of top 10 hedge fund stocks hasn’t changed much since the third quarter of 2018. If you had invested in this low turnover simple strategy at the beginning of 2014, you would have outperformed the S&P 500 ETFs by 114 percentage points in 8 years.
Hedge funds knew these 10 stocks are the “best” 10 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 more than 5 years ago and this strategy’s picks returned 159.9% since then and beat the SPY by 70 percentage points. Our subscription prices start at $89 per year and come with a 14-day full refund guarantee.
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. They misrepresent hedge funds’ stock picking skills. Hedge fund indices underperform the market because hedge funds 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 the 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 10 hedge fund picks over the last 8.5 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 most of which now trade for more than $1 trillion valuation.
The best thing about following hedge funds’ top picks on our website is that you don’t need to pay hedge funds 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 2022. If you are only interested in large-cap stocks, check out the top 5 stocks in this list below:
