Top Three Hedge Fund Money-Makers Over Last Decade

Introduction

Hedge fund managers have faced a lot of scrutiny from investors, as returns from the industry as a whole have simply not been on par with expectations. But the averages hide many positive outlying managers who were able to identify massive opportunities and deliver solid returns to investors. In most cases, the positive outliers in long/short equity identified stocks that crushed the market and invested in them early.

In this article we’ll take a look at the most successful hedge fund stock picks over the last decade (January 1 2006 through November 30 2015) and identify the trades that have made managers billions. In addition, we’ll credit the managers that identified these opportunities early and led the pack instead of following it.

To isolate the most important hedge fund stock picks, we’ll use our Conviction Index, an equally-weighted portfolio made up of twenty stocks with the highest number of hedge fund managers invested with conviction (large positions weights). The portfolio is rebalanced each quarter with the release of 13F filings to include stocks that represent a significant portion of managers’ public portfolio.

Performance of the Conviction Index

Using this methodology, a portfolio of only the highest conviction hedge fund stocks outperforms the markets by a wide margin over the last decade.

In the last ten years, the Conviction Index returned a total of 247% compared to 106% for the S&P 500 with dividends. Not every stock is a winner, as 69% of all conviction securities had positive P&L for the period, but the winners were massively profitable. The average winning long stock pick made 285bps for the Index, and the average losing long stock pick cost just 178bps. Let’s take a look at the big winners of the decade.

Top contributor # 1: Apple

Ten years ago there was no iPhone and there were less than 100 hedge fund managers invested in Apple, by far the most popular HF stock today. By the end of 2006, managers made it a conviction bet, a year ahead of the most-hyped consumer product release ever. Needless to say, managers stayed heavily invested in the stock ever since, and it’s the second longest tenured stock in the Conviction index, bested only by Berkshire Hathaway. Some of the hedge funds to call this early were Water Street (25% position in December 2005), Tremblant, and Andor Capital. Other notable managers invested early were Lone Pine, Kleinheinz, Maverick, and Maple Leaf Partners.

The stock was a boon for hedge funds, especially those invested early. The price increased 1000% over the decade and contributed a total of 25 percentage points to the Conviction index.

Apple: Price vs. Contribution to Conviction Index

Top Contributor #2: Google

Unlike Apple, Google was already a high conviction bet for managers in early 2006 and stayed in the Index through Q1 2014. It fell out of conviction for over a year, until most recently, when it was again a conviction bet in 9/30 filings. Google contributed 18 percentage points to the Index, less than Apple but still massive. The managers who spotted this early were Steve Mandel’s Lone Pine (largest HF holder in December 2005), Tremblant, and Andor Capital. All three managers had conviction bets on Google less than two years after its IPO and before it was even in the S&P 500! Other managers who invested heavily early on were Tiger Global, TCS Capital, Coatue, and Artis Capital.

Google: Price vs. Contribution to Conviction Index

It’s impressive to see that managers’ timing has been extraordinary for this stock, especially in recent years. During the period where Google fell out of conviction, it was relatively flat, and when managers expressed renewed conviction it began to rally again.

Top Contributor #3: Facebook

It’s surprising that the third highest contributor to the Index only became a part of it in 2013, shortly after the social network’s massive yet disappointing IPO in May of 2012, contributing 12 percentage points to the Index. One of the earliest investors, Cavalry Asset Management, didn’t keep the stock in its book long enough to truly benefit, selling in the first quarter of 2013. But by the third quarter of that year, many other managers caught on and made it a conviction bet. Lone Pine was again early (although not a conviction bet). SRS, Andor, Conatus, and Steadfast all made Facebook a core position in their portfolios early enough to fully benefit from the subsequent rally. Valiant, Bridger, Antipodean, Falcon Edge, and Miura Global were also early and heavy the stock at the right time, contributing to its robust conviction among hedge funds.

Facebook: Price vs. Contribution to Conviction Index

Other Major Contributors

Two more stocks that contributed north of ten percentage points to hedge fund Conviction were Microsoft (Still in Conviction) and Twenty-First Century Fox (dropped from conviction in Q2 2014). Over the decade other notable names were Visa, AIG, Valeant, and MasterCard. It’s important to note that most of the alpha for hedge funds came from large and mega-cap stocks over the years, contrary to investors’ views.

The Hedge Fund Survival Guide: Volume One

While the reasons may be disputed, most will agree that the past few years have presented enormous challenges to hedge fund managers and active managers in general. As evidence, we’re beginning to see higher-than-normal closures and redemption suspensions from previously successful managers. It feels like it’s more than just a string of bad bets. It feels like the current market regime isn’t conducive to the fundamental research and value investing that has served managers for decades.

Incredibly, we’ve seen some of the most celebrated, marquee hedge funds struggling in situations like Valeant, Community Health, and Sun Edison. In this environment, it’s no longer enough to be a great stock picker. Managers need to evolve.

This is why we’ve begun publishing exclusively for the hedge fund manager, The Hedge Fund Survival Guide.

This practical guide outlines the best-in-class practices of the top hedge funds in concepts such as risk management, analyst compensation, client reporting, and attribution analysis. It’s a must read for hedge fund managers that are committed to improving—instead of fading away in this new market regime.

Download our latest research to learn more.