Using hedge fund 13F filings as a starting point to try and get investment ideas can produce some interesting results.
On the one hand, there is research that shows buying companies loved by hedge funds will result in losses. But on the other hand, these holdings can be a great starting point for further research, throwing up interesting ideas worthy of further investigation.
It's always interesting to see where the world's highest paid and most successful investors are putting cash to work, even if there's no desire to buy the stocks in question.
The most loved stocks
According to data from GuruFocus, one of the most loved stocks for hedge funds is Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
They say imitation is the sincerest form of flattery, which in this case seems true. Buffett has been a vocal critic of hedge funds in the past, primarily because of their poor returns and the excessive fees they charge. The substantial ownership of Berkshire Hathaway seems to validate this criticism.
15 of 64 'value-focused' funds hold stakes in Berkshire, accounting for 2% of the overall portfolio tracked (of all positions monitored by the 64 investors the site follows. This is just limited to the B shares; if you include A shares as well, concentration is even higher). Not only has Berkshire Hathaway achieved better returns for investors over the past four decades than most of the funds profiled, but it has also done this without charging a cent in fees. Funds are charging 2% management fees and 20% performance fees to buy Berkshire and hold, which misses the point of hedge funds, which are supposed to find new and original ideas.
The data suggests they are not following this mantra at all. A third of all 64 value-focused funds are focused on just five key stocks, Alphabet (GOOG, Financial), Wells Fargo (WFC, Financial), Microsoft (MSFT, Financial), Bank of America (BAC, Financial) and Facebook (FB, Financial) (number six is Berkshire).
What's interesting about these holdings is it seems they are helping hedge funds beat the market for the first time in almost a decade. As CNBC reported at the beginning of May, "managers in the $3.2 trillion hedge fund industry posted a 0.38% gain in April that brings the total return for the year to 0.39%, according to industry tracker HFR." This was nearly 1% more than the return of the S&P 500 over the same period, which posted a loss, including dividends, of 0.38% through the first four months.
The best-performing sector was, somewhat unsurprisingly, tech. Health care and tech returned 4.5% for the period.
So are hedge funds outperforming because they've picked the right stocks, or are they just benefitting from momentum? It certainly looks as if it's a bit of both scenarios. Tech stocks are some of the market's fastest-growing companies right now, but they're also the best-performing momentum stocks.
Another interesting takeaway from this data is hedge funds currently look to have all bases covered. What I mean by this is funds are exposed to the market's fastest-growing tech stocks, while at the same time, they also have an option on some of the best old economy stocks on the market in the form of Berkshire Hathaway.
Conclusion
So what's the primary takeaway from all of this? While it can be argued that hedge funds are just buying the market's best momentum stocks, I think there's more to it than this. It seems hedge funds are buying the markets best stocks. Alphabet, Facebook, Microsoft, Wells Fargo and Berkshire are some of the best run and managed businesses around. They have all produced outstanding returns for investors, and look set to continue doing so for the foreseeable future.
Disclosure: The author owns no stock mentioned.
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