It’s once again time for the quarterly exercise in which we scrutinize 13F filings for investors so they can emulate the largest stock holdings among the hedge fund set. Of course, this following of the hedge fund crowd may not necessarily produce optimal results.
Hedge funds are making it increasingly easier for investors to mimic their portfolios. According to Goldman Sachs, turnover of hedge fund portfolios dropped to a record low 27 percent in the second quarter. What’s more, the largest positions experienced only a 14 percent turnover. This is significant given that hedge funds generally run more concentrated portfolios than other investors.
For example, Goldman points out that the average hedge fund has 69 percent of its long equity assets invested in its ten largest positions. This compares with just 33 percent for the typical large-cap mutual fund, 22 percent for small-cap mutual funds, 18 percent for the Standard & Poor’s 500 stock index and only 2 percent for the Russell 2000 Index.
With this in mind, firms like Goldman regularly slice and dice these filings in hopes of discovering a common trend that will deliver consistently strong results. For example, Goldman’s so-called VIP list of the 50 stocks that appear most often among the top ten holdings of fundamentally driven hedge fund portfolios has beaten the S&P 500 for 64 percent of the quarters going back to 2001. On average, they have exceeded the benchmark by 51 basis points per quarter, which works out to outperformance of 2 percentage points per year. That’s pretty good and we have highlighted this result in the past.
Goldman also looks at the 50 stocks with the largest number of hedge fund investors, regardless of the size of the position and their ranking in portfolios. The firm does not calculate performance for this basket.
In any case, these are the two lists that the media often focuses on. These two rankings mostly contain large-cap names most people are familiar with: Facebook, Amazon.com, Apple, Microsoft Corp. You get the idea.
However, one other basket of stocks tracked by Goldman that generally goes unnoticed may be the best to emulate. These are the 20 most concentrated hedge fund stocks — stocks in the S&P 500 with the highest percentage of hedge fund ownership.
This group has outperformed the S&P 500 in 69 percent of the quarters since 2001, with an average outperformance of 256 basis points — or 2.56 percentage points — per quarter. On an annualized basis, this works out to outperformance of 10 percentage points per year. Wow!
These stocks tend to be midcaps at the lower end of the S&P 500 capitalization scale, Goldman points out. Several of them are well-known, while others are relatively obscure.
And although these stocks got off to a bad start this year, they have outperformed the S&P 500 by 11.25 percentage points in the year through August 15.
This result extends the recent trend of strong outperformance. Goldman points out that the basket lagged the benchmark by 4 percentage points in 2011. However, since then it has beaten the S&P 500 in each of the subsequent four years by 8, 17, 7.2 and 4.1 percentage points, respectively.
In the second quarter of this year, four new stocks entered this basket of 20: auto repair retailer Advance Auto Parts, container maker Ball Corp., aircraft component maker TransDigm Group and airline United Continental Holdings.
Heading the list of 20 is Autodesk, which develops and sells 3-D design software. At the end of the second quarter, 27 percent of its market cap was owned by hedge funds. Four of its six largest investors are New York–based hedge fund firms: Eminence Capital, Sachem Head Capital Management, Soroban Capital Partners and Blue Ridge Capital. The stock is the largest position of three of those four firms largely because it is a target of activist funds.
In March, Autodesk named three new directors to its board under a settlement reached with Sachem Head and Eminence.
Online travel agency Expedia and jewelry retailer Signet Jewelers are tied for second on that Goldman list, with 25 percent hedge fund concentration. Expedia’s largest hedge fund investor is New York–based Tourbillon Capital Partners, which counts the stock as its second-largest U.S. long.
Other significant hedge fund holders include New York–based JANA Partners and Coatue Management.
Signet is also the target of activists. Its largest hedge fund investor is New York–based Corvex Management, while its tenth-largest investor is San Francisco–based Marcato Capital Management.
San Francisco–based Farallon Capital Management is also a major investor in Signet.
Here are the 20 stocks in the S&P 500 with the greatest hedge fund concentration:
1. Autodesk, 27 percent
2. Expedia, 25
3. Signet Jewelers, 25
4. TransDigm Group, 23
5. Williams Cos., 21
6. Constellation Brands, 20
7. Dollar Tree, 20
8. Humana, 20
9. Southwestern Energy, 19
10. AutoNation, 19
11. EMC Corp., 19
12. Advanced Auto Parts, 19
13. Yahoo, 19
14. Mallinckrodt, 18
15. Range Resources Corp., 16
16. United Continental Holdings, 16
17. Ball Corp., 16
18. Chesapeake Energy Corp., 16
19. Transocean, 15
20. Endo International, 15
Source: Goldman Sachs
