John Overdeck and David Siegel‘s quant fund, Two Sigma Advisors launched a new fund this year, Two Sigma Absolute Return Macro Master Fund, which managed to raise a massive $3.3 billion, the largest capital among last year’s fresh fund offerings. In 2014 when the average hedge fund return was somewhere between 2.5% to 3%, Two Sigma Enhanced Compass Fund posted eye popping returns of 57.55%.
The $24 billion fund was founded in 2001 by the two D E Shaw veterans, one a computer scientist, the other a statistician, and both united in their belief that technology is an extremely powerful tool when it comes to finding meaningful and profitable data trends in the realm of finance. Keeping this belief in mind and given the fact that the information technology sector constituted the greatest percentage of the firm’s equity portfolio at 22%, we decided to take a closer look at Two Sigma’s top tech picks, according to the firm’s latest 13F filing. These included Google Inc (NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT), Western Digital Corp (NASDAQ:WDC), Yahoo! Inc. (NASDAQ:YHOO) and Micron Technology, Inc. (NASDAQ:MU). The fund’s equity portfolio is well diversified, with its top ten holdings constituting only 9.88% of its total value. According to our methodology, which is based on the weighted average returns of the fund’s long equity positions in companies exceeding $1 billion in market cap, Two Sigma returned 3.2% in the first quarter based on over 1300 holdings, even though most of its top technology picks were in the red. The actual fund’s returns are likely to be different, as our metric doesn’t take into account derivatives and other investment instruments that these managed future funds heavily rely on.
While quant funds posted a strong performance in 2014, we cannot say for sure that computer algorithms will completely replace the stock picking skills of fund managers in the future. A much larger time duration is needed to draw such a conclusion since market drivers differ from year to year. At Insider Monkey, we have developed a trading strategy which is backed by 13 years of back tests and nearly three years of forward testing. Through our research we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month between 1999 and 2012. On the other hand the most popular large-cap picks of hedge funds underperformed the same index by 7 basis points per month during the same period. In forward tests from the end of August 2012 through March 2015, these top small-cap stocks beat the market by a hefty 79.4 percentage points (read the details here).
After initiating a position in Google Inc (NASDAQ:GOOGL) during the second quarter of 2014, Two Sigma increased its stake by a whopping 217% in the third quarter and then by a further 56% in the fourth quarter to about 302,400 shares valued at $160.46 million. The stock, which formed Two Sigma’s most valuable equity holding was the only stock pick among those under discussion that ended up in green over the first quarter, as it gained 4.53%. Google Inc (NASDAQ:GOOGL) has recently confirmed its plans to launch an ad-free subscription service for its video platform, YouTube. Content providers are expected to get a 55% share of the subscription revenue. Among over 700 hedge funds that we track, Boykin Curry‘s Eagle Capital Management and Ken Fisher‘s Fisher Asset Management held the highest stakes in Google Inc (NASDAQ:GOOGL) toward the end of 2014.
Microsoft Corporation (NASDAQ:MSFT)’s stock price dropped by nearly 11.84% during Q1. Two Sigma’s second-largest stock holding contained 3.09 million shares valued at $143.69 million. The tech giant is in a transition phase under CEO Satya Nadella as it reduces its reliance on Windows and is venturing into the cloud and mobility space along with other promising products such as its recently launched Surface 3 and Surface Pro 3 tablets. Among the billionaires that we track, 14 had placed bets on the stock, with an aggregate investment of $2.63 billion at the end of 2014. Ken Fisher was one of them as his firm Fisher Asset Management held 17.6 million shares of Microsoft Corporation (NASDAQ:MSFT) valued at $818.53 million.
Western Digital Corp (NASDAQ:WDC) slid steeply by 17.34% during the first quarter. The manufacturer of hard drives and solid state drives also felt the chill of declining PC sales during Q1. Western Digital has been connected to SanDisk Corporation (NASDAQ:SNDK) recently, which according to some analysts is the perfect buyout target for it considering its low trading levels. The acquisition also makes sense as Western Digital Corp (NASDAQ:WDC) has been trying to make inroads in the flash memory territory through its other acquisitions. Overdeck and Siegel held 1.02 million shares valued at $113.23 million of Western in their fund’s portfolio. Other prominent investors in the company include Cliff Asness‘ AQR Capital Management and Ken Griffin‘s Citadel Investment Group.
Besides the announcement of the spinoff of its Alibaba’s stake, Yahoo! Inc. (NASDAQ:YHOO) has provided little evidence of improvement in its core operations during the first quarter, and its stock depreciated by 12.02% during this period. The fall came despite the company adding $2 billion to its buyback program, which currently stands at $2.73 billion. Two Sigma’s stake in the tech company was comprised of 2.13 million shares valued at $107.56 million. James Dinan’s York Capital Management sees better days for Yahoo! Inc. (NASDAQ:YHOO) ahead as it initiated a position in the company with 9.40 million shares valued at $474.69 million during the fourth quarter.
Micron Technology, Inc. (NASDAQ:MU)’s shares slumped by 22.51% during the first quarter and the company went on to provide a lower guidance than anticipated for its 2015 fiscal third quarter. However, the future for the manufacturer of semiconductor devices looks bright in the long run as it recently announced the arrival of its 3-D NAND technology, the world’s highest density flash memory. Besides Two Sigma, which held 2.99 million shares of Micron Technology, Inc. (NASDAQ:MU) valued at $113.23 million, another prominent stockholder was billionaire Seth Klarman’s Baupost Group.
Disclosure: None
