For all their posturing, the $3 trillion hedge fund industry returns actually fared worse than the S&P 500 last year. While the S&P 500 dropped 0.73%, the average hedge fund lost about 1%.
And some—like William Ackman’s Pershing Square Capital Management and David Einhorn’s Greenlight Capital—took their clients to the cleaners, losing 19.5% and 20%, respectively.
How can this happen, you might ask? Aren’t hedge funds supposed to be led by the most sophisticated investors in the land, delivering the best expert advice to their super-rich investor clients?
The answer is yes and yes. However, if you remember that hedge funds are largely unregulated so they can take big bets on stocks (either long or short), it stands to reason that the risk of losses can be significant, especially when the markets are very volatile. And that’s exactly what happened last year.
Led by huge bets that energy would bounce back, most hedge funds tanked when those prognostications didn’t pan out. But don’t lose too much sleep over the hedge fund managers’ lack of profits. While their clients took steep losses, the funds’ annual fees, which average 2% of assets, kept them in champagne and caviar.
Yet investors continue to be allured by the elitism associated with hedge funds. But, if you look back for the last five years, the S&P 500 has returned 11.81% to investors, while the average hedge fund gain was just 3%.
Just for fun—and maybe to apply some contrarian investing techniques—I decided to look at what hedge funds are doing right now.
What the Hedge Funds Are Doing Right Now
I found that hedge funds are spending big bucks, purchasing more equities so far this year than they have bought in the past five years, according to Bank of America Merrill Lynch, whose hedge fund clients have purchased more than $2.3 billion of stocks.
And they are crowding into a lot of the same issues—what the industry refers to as ‘hedge fund hotels’—stocks where many hedge funds park their money.
The latest list of hedge fund darlings shows that tech stocks dominate the buying.
Should You Buy These 5 Stocks?
Let’s take a look at the hedge funds’ top five holdings, and how analysts currently view them.
Most analysts on Wall Street are fundamental in nature. That is, they look at a company’s long-term prospects—it’s earnings, cash flow, debt to equity and valuation. But most also review technical indicators to determine the right time to buy and sell.
In each of the top five hedge fund holdings, fundamental analysts are mostly positive. On a scale from one to five (with one being a Strong Buy), all of them—with the exception of Time Warner—rate a Buy. (Time Warner looks like a Hold to me.) But when you skip over to the last column of the above table, you see that out of the five stocks, just two—Time Warner and Facebook—have caught the eye of the technical analysts, who think it’s a great time to buy.
As for our contributors to Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks, Patrick McKeough, editor of Wall Street Stock Forecaster, likes Google, based on its continued growth and entrance into the recurring revenue, streaming services. Todd Johnson of Dividend Lab recommends Facebook (our Spotlight Stock in issue 775 of Wall Street’s Best Investments), due to its double-digit growth, strategic partnerships which are bringing new avenues of expansion, and the company’s smart acquisitions that are fueling innovative products.
And Mike Cintolo, chief analyst of Cabot Growth Investor, recently sold his shares of Amazon, as he feared the company’s heavy spending would lead to continued underperformance of its stock.
As you know, past performance doesn’t always portend future gains. And as we can see from just the last five years of hedge fund underperformance, investors shouldn’t get carried away with emulating their buying habits.
And I’ll just add that it’s worth your while to do a little research before diving in to any list of “Top Stocks to Buy.” Make sure you look beyond the headlines, and also remember that your equity purchases should fit your strategies and ultimate investment goals.
Happy investing,
Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks
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