Betting on Alibaba and NVIDIA Help Keywise Return 65%; Here Are Its Other Top Picks

Imitating hedge funds is a very useful approach that can help smaller investors identify stocks to buy. Hedge funds, as compared to other institutional investors, are more inclined to thoroughly research every stock they invest in and they allocate more resources and have better skills at picking stocks than retail investors. In the current market environment, it’s best to follow smaller funds. Because they have less capital and are usually younger than their larger and established peers, smaller hedge funds can navigate easier through changes, can adjust their strategies more efficiently, and can afford to take on more risk. One fund that we would like to talk about is Keywise Capital Management, led by Fang Zheng.

Mr. Zheng started his career working at the Ministry of Machinery and Electronics Industry and CITIC in China. Later he worked at Rockefeller & Co., Inc. in New York as an equity analyst. He later joined JP Morgan Emergy Market Equity Group, where he first was an equity research analyst and then became a vice president and portfolio manager. In 2002, Mr. Zheng co-founded Neon Liberty and served as portfolio manager and managing director. In 2006, Mr. Zheng founded Keywise Capital Management, a Hong Kong-based hedge fund that currently has over $2.30 billion in regulatory assets under management.

Keywise is one of over 600 hedge funds that we follow at Insider Monkey as part of our investment strategy. Through extensive research we discovered that following the most popular picks among a group of best-performing hedge funds can significantly beat the market over the long run. Our strategy identifies the best stock picks among 100 best-performing hedge funds at the end of each quarter. One of the main points of our strategy is that if several hedge funds invest in the same company independent of each other, then that company might have something going on for itself, so it has a greater chance of beating the market. This approach has proven successful, as our strategy has returned over 67% since May 2014, beating the S&P 500 ETF (SPY) by more than 20 percentage points. We share the stock picks from our strategy in quarterly newsletters that you can access for free for 14 days here.

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We assess the fund’s returns by calculating the weighted average performance of its holdings in companies worth over $1.0 billion. This approach allows us to identify the best-performing hedge funds solely based on their stock picks that they disclose in quarterly 13F filings and we can exclude investments that hedge funds are not required to report with the SEC. In this way, following Keywise is important because this fund has returned over 65% in the 12-month period ended March 31. During the first quarter alone, Keywise managed to return almost 16%.

According to its last quarterly 13F filing, Keywise Capital had a 13F portfolio valued at $252.74 million at the end of the fourth quarter. During the last three months of 2017, Mr. Zheng made some significant changes, particularly, closing seven positions and cutting its exposure to the majority of other investments. In this way, heading into 2018, Keywise had three major holdings: Alibaba Group Holding Ltd (NYSE:BABA), NVIDIA Corporation (NASDAQ:NVDA), and Baidu Inc (ADR) (NASDAQ:BIDU), which collectively amassed 55% of the equity portfolio value. Alibaba Group Holding Ltd (NYSE:BABA) and NVIDIA Corporation (NASDAQ:NVDA) both generated strong returns for Keywise, as the fund had held these companies since 2016. On the other hand, the stake in Baidu Inc (ADR) (NASDAQ:BIDU) was acquired during the October-December period.

With this in mind, let’s take a closer look at how Keywise’s top picks performed and what is the outlook for its potential next top plays.

In Alibaba Group Holding Ltd (NYSE:BABA), Keywise held 301,413 shares worth $51.97 million heading into the first quarter of 2018. The stake was reduced by 23%, but still amassed almost 21% of the fund’s equity portfolio. After almost doubling in value during 2017, Alibaba Group Holding Ltd (NYSE:BABA) is still going strong, as it has gained another 6% since the beginning of the year. Over the last couple of years, Alibaba Group Holding Ltd (NYSE:BABA) has been working hard to establish itself not only as an eCommerce leader in China, but also venturing into the brick-and-mortar retail, as well as other industries such as food delivery, cloud computing, bike sharing. In addition, Alibaba Group Holding Ltd (NYSE:BABA) has embarked on a campaign to expand geographically, with a focus on South East Asia. Among its latest acquisitions is Daraz, owned by Rocket Internet, which Alibaba purchased for an undisclosed amount. Daraz will allow Alibaba Group Holding Ltd (NYSE:BABA) to expand its ecommerce segment, as  it has operations in Pakistan, Bangladesh, Myanmar, Sri Lanka and Nepal. Aside from Keywise, 114 funds tracked by Insider Monkey were long Alibaba Group Holding Ltd (NYSE:BABA) at the end of 2017.

In NVIDIA Corporation (NASDAQ:NVDA), Keywise slightly reduced its position by 1,700 shares to 240,220 shares worth $46.48 million. Overall, 48 funds in our database disclosed long positions in NVIDIA Corporation (NASDAQ:NVDA) in the last round of 13F filings. Helped by the boost in the cryptocurrency market that drove sales of GPU higher, NVIDIA Corporation (NASDAQ:NVDA)’s stock surged by 90% in 2017 and is 30% in the green year-to-date. During the first quarter, NVIDIA Corporation (NASDAQ:NVDA) saw GPU sales jump by 77% to $2.78 billion, while Tegra Processor sales increased by 33% to $442 million. Across platforms, OEM and IP (which includes GPUs for cryptocurrency mining)  saw revenue jump by almost 150% on the year, but Gaming and Datacenter also saw substantial growth of 68% and 71%, respectively. Looking ahead, both analysts and the management expect the demand from the cryptocurrency market to decline, but, nevertheless, NVIDIA Corporation (NASDAQ:NVDA) is expected to shine in the Gaming and Datacenter segments, while its newer platforms, such as AI and automotive shoulf continue to gain ground. Overall, NVIDIA Corporation (NASDAQ:NVDA)’s first-quarter EPS of $0.25 and revenue of $3.21 billion topped analyst estimates by $0.39 and $310 million, respectively.

Let’s now move on to Keywise’s newer bets. In Baidu Inc (ADR) (NASDAQ:BIDU), the fund initiated a stake containing 182,200 shares worth $42.67 million during the fourth quarter. Since the beginninf of 2018, Baidu Inc (ADR) (NASDAQ:BIDU)’s stock has appreciated by 11% as the company made headlines on a number of occasions. In March, the company received first licenses for open-road testing of its autonomous cars in Beijing and entered into an agreement with Meituan-Dianping to develop driverless cars for food delivery. In April, Baidu Inc (ADR) (NASDAQ:BIDU) announced that it would divest its majority stake in financial services business Du Xiaoman. Moreover, the company delivered strong first-quarter results, with EPS of $2.60 beating the estimates by $0.96, while its revenue went up by 25% on the year to $3.33 billion, topping expectations by around $140 million. Baidu Inc (ADR) (NASDAQ:BIDU) also saw a 26% growth in core revenue to $2.57 billion, while the share of mobile revenue went up by eight percentage points to 78%. For the current quarter, Baidu expects revenue between $3.97 billion and $4.17 billion, which is higher than the consensus estimate of $3.78 billion. A total of 52 funds from our database held shares of Baidu Inc (ADR) (NASDAQ:BIDU) at the end of 2017.

Even though Momo Inc (ADR) (NASDAQ:MOMO) was not added to Keywise’s equity portfolio during the fourth quarter (the stake was initiated during the second quarter of 2017), it’s still noteworthy because the fund boosted its exposure to the company almost sixfold to 1.29 million shares valued at $31.50 million during the fourth quarter. The position was increased as Momo Inc (ADR) (NASDAQ:MOMO)’s shares slid by over 20% during the fourth quarter and the bet paid off as the stock has gained over 45% since the beginning of 2018. The stock returned to growth as investors regained confidence in user growth and live-video revenues. For the fourth quarter, Momo Inc (ADR) (NASDAQ:MOMO) reported live-video service revenue of $328 million, up by 68% on the year and the number of monthly active users jumped to 99.1 million from 81.1 million. For the first quarter, Momo Inc (ADR) (NASDAQ:MOMO) expected revenue between $387 million and $402 million. The company is expected to report its first-quarter earnings on May 22. Overall, 17 hedge funds disclosed long positions in Momo as of the end of 2017.

Disclosure: none