In our experience one of the best tools for ordinary investors who are on the hunt for new ideas is 13F filings. Once every quarter, hedge funds with at least $100 million in total positions in publicly traded US stocks are required to disclose the number of shares and the total value of its positions in each of the stocks and options in their portfolios. In the last 7 days we processed 835 13F filings from as many hedge funds and prominent investors to produce our quarterly report.
Hedge funds hire some of the smartest Ivy League graduates as their analysts, have access to industry insiders whom they “consult” with, use unconventional data sources that cost tens of thousands of dollars, possess years of experience and millions of dollars as incentives to come up with the next great investment idea. Every quarter we process around 800 hedge funds’ 13F filings to identify each hedge fund’s new moves, top stock picks, and more importantly overall sentiment changes towards each of the 4000 stocks that are publicly trading. We publish all of our analysis in our premium quarterly newsletter (download a free sample), and then share interesting bits and pieces on our website.
Yesterday we published the list of 30 most popular stocks among hedge funds as of December 31 (you can also see Q3 rankings here). This list’s top 20 stock picks have been performing much better than the market indices that you see on your financial news websites and channels. In 2019 the top 20 most popular hedge fund stocks returned more than 41% and outperformed the S&P 500 Index by more than 10 percentage points. If you have $500,000 invested in an index fund that tracks the market, you left $50,000 on the table last year by not imitating hedge funds’ top 20 stock picks instead. Below, you can watch our video about hedge funds’ top 5 stock picks. The list of top 5 stock picks didn’t change from Q3 to Q4.
Video: 5 Most Popular Stock Among Hedge Funds (click here if you don’t see the video)
If you read the mainstream financial media you’d come across several articles about hedge fund underperformance, capital outflows, and hedge fund closures. These articles tell only one side of the story and mislead investors. There are two main reasons for hedge fund underperformance. First, hedge funds are hedged. Even though they beat the market on the long side, their short stock picks also rise during strong bull markets and bring down their gross returns.
Second, hedge funds charge an arm and a leg for their services. This is really at the heart of why investors hate hedge funds and yank their capital away from them. We have been showing you for more than 7 years how to generate market beating returns by imitating insiders and hedge funds. For example, you could have invested in the top 20 hedge fund stocks in 2019 by yourself without paying a dime to anyone and beat the market by 10 percentage points. This is what hedge funds that get paid millions are doing. Unfortunately a hedge fund that generates a 41% gross return charges close to 2 points in management fees and 8 points in performance fees, bringing down their investors’ net returns to 31%.
Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. We leave no stone unturned when looking for the next great investment idea. We read hedge fund investor letters, listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out recommendations of services with hard to believe track records. Last month, we recommended a long position in one of the most shorted stocks in the market. No, our recommendation wasn’t Tesla (TSLA). It was a better pick than Tesla as this stock gained more than 50% in 4 weeks. Sometimes, though not this time, we share the names of these stocks free of charge in our free e-newsletter. You can subscribe to our e-newsletters on our website to get these emails before the rest of the market.
Hedge funds’ top stock picks don’t change much from quarter to quarter. So, the 45 day delay in 13F filings doesn’t materially affect the performance of investors who are riding the coattails of successful hedge fund managers. The top 20 stocks among hedge funds at the end of December are performing spectacularly so far in the first quarter. The top 20 stocks among hedge funds returned 8.9% through February 18th and outperformed the market by an additional 4.3 percentage points. Since the end of 2018 hedge funds’ top 20 picks returned 53.8% and beat the market’s 37.3% gain by 16+ percentage points.
This quarter Merck & Co., Inc. (NYSE:MRK) saw a decline in hedge fund sentiment and dropped out of our most popular healthcare stocks rankings. Here is our list of the top 4 healthcare stocks hedge funds are piling into at the end of December:
4. Johnson&Johnson (NYSE:JNJ): $149.14
Number of Hedge Funds: 85
Total Dollar Amount of Long Hedge Fund Positions:$8.3 billion
Percent of Hedge Funds with Long Positions: 10.2%
First Quarter Return (through February 18th): 2.2%
Popularity Ranking (Q3): 27
Noteworthy Hedge Fund Shareholders: Quant hedge funds AQR, DE Shaw, Renaissance, and Two Sigma
3. Allergan plc. (NYSE:AGN): $198
Number of Hedge Funds: 86
Total Dollar Amount of Long Hedge Fund Positions:$9.9 billion
Percent of Hedge Funds with Long Positions: 10.4%
First Quarter Return (through February 18th): 4.0%
Popularity Ranking (Q3): 22
Noteworthy Hedge Fund Shareholders: Dan Loeb, John Paulson
2. UnitedHealth Group (NASDAQ:UNH): $302.14
Number of Hedge Funds: 91
Total Dollar Amount of Long Hedge Fund Positions:$7.9 billion
Percent of Hedge Funds with Long Positions: 11%
First Quarter Return (through February 18th): 2.8%
Popularity Ranking (Q3): 25
Noteworthy Hedge Fund Shareholders: Stephen Mandel, Boykin Curry
1. Bristol-Myers Squibb (NYSE:BMY): $66.07
Number of Hedge Funds: 122
Total Dollar Amount of Long Hedge Fund Positions:$7.8 billion
Percent of Hedge Funds with Long Positions: 14.7%
First Quarter Return (through February 18th): 3.7%
Popularity Ranking (Q3): NA
Noteworthy Hedge Fund Shareholders: Philippe Laffont, Gabriel Plotkin
