The following is an excerpt from Meena Krishnamsetty | September 24, 2012 | Smartmoney.com |
Equity hedge funds usually hedge around 50% of their long exposure. It just doesn’t make sense to compare them to the S&P 500 Index SPX +1.15% , which is 100% long. So we came up with a better way of illustrating hedge funds’ true stock picking ability and constructed an index that is 100% long. We launched the Insider Monkey Billionaire Hedge Fund Index at the beginning of this year. The index is based on the 13F disclosures of billionaire hedge fund managers and prominent investors. It is composed of the 30 most popular stocks among billionaires and each stock’s weight is proportional to its popularity.
We update the index around 50 days after the end of each quarter to give ourselves enough time to process the filings. I can hear you questioning whether there is any value in imitating hedge funds’ stock picks two months after they are known to be holding these stocks. Some may argue that they may have sold or even started to short these stocks during this two month delay. Technically it is possible but we don’t think it is probable.
Since the beginning of this year Insider Monkey’s Billionaire Hedge Fund Index returned 25.3% vs. a gain of 18% for the S&P 500 ETF SPY +1.15% . Of course an average equity hedge fund didn’t return 25.3% so far this year because hedge funds aren’t usually 100% long and they charge hefty fees. Our index avoided these shortcomings and managed to beat the market by 7 percentage points despite using “stale” data. Let’s take a look at the top 5 stocks in this index at this moment:
1. Apple AAPL +2.18% is the most popular stock among billionaire fund managers. More than 40% of the billionaires had a large position in Apple at the end of June. Apple is also the most popular stock among other hedge fund managers (see the 10 most popular stocks ). Apple has been an obvious value play for a very long time. At the beginning of 2011 the market valued the stock as if it was a low growth utility stock. By the end of the summer of 2011, low growth utility stocks had even higher multiples than technology stocks like Apple and Microsoft. Investing in Apple was really a no brainer. It is still very attractively priced despite returning 73.6% so far this year. Billionaires Ken Griffin , David Einhorn , and Stephen Mandel are extremely bullish about the stock.
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