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Every quarter, funds managing over $100 million must share their portfolio moves as part of their 13F filings. These filings can be goldmines, providing unique insights into recent decisions made by some of the best money managers. So, let’s look at the Q1 update.
Today at a glance:
Hedge funds’ strategies.
Top buys and top holdings in Q1.
Case studies.
Implications for individual investors.
As usual, this seasonal article comes with some caveats. Blindly replicating the trades of the so-called ‘smart money’ is a recipe for disaster. Investing decisions are like shots from the 3-point range on a basketball court. Even Steph Curry—the best shooter in history—misses more than half of his attempts. In investing, there is no such thing as a sure bet.
Your patience and capacity to stay the course matters more than what you put in your portfolio. Your success hinges on your behavior. Peter Lynch says you should “know what you own and why you own it."
Conviction is a critical step in an investing framework because all companies go through a rough patch, and their stock inevitably collapses, at least temporarily.
As wonderfully put by Ian Cassel:
“You can borrow someone else’s stock ideas but you can’t borrow their conviction. True conviction can only be obtained by trusting your own research over that of others. Do the work so you know when to sell. Do the work so you can hold. Do the work so you can stand alone.”
Some limitations of 13F filings:
Offer a partial view, leaving out smaller funds.
Can be dated, given their submission 45 days post-quarter.
Exclude non-US equities, bonds, and commodities.
Omit short positions and cash reserves.
With all this said, let’s peek at what hedge funds were buying and holding in Q1 2024 and what we can glean from it.
1. Hedge funds’ strategies
Hedge funds are financial titans known for their sophisticated and flexible investment strategies aimed at achieving sky-high returns.
Here's a breakdown of the pillars shaping their strategies:
Market conditions: Hedge funds adjust their sails according to the economic winds. In bull markets, long positions may be favored, while bear markets might see an uptick in short selling or other defensive tactics.
Sector trends: Changes in consumer behavior or new legislation can drive hedge funds toward specific industries, influencing their buying patterns.
Company fundamentals: A company's earnings, cash flow, and management quality often dictate investment choices.
Macroeconomic factors: Global events, from interest rate changes to geopolitical shifts, play a significant role in hedge fund decision-making.
Quantitative models: Many funds employ complex, proprietary models, uncovering opportunities that traditional analyses might miss.
Risk management: Hedge funds don't just chase returns; they also strategically diversify to mitigate risks.
Investor sentiment: The market's mood can lead to undervalued opportunities or selling points in a euphoric market.
It doesn't always work out. The Global X Guru ETF (GURU), mirroring some top hedge funds, illustrates a sobering reality: it has trailed behind the S&P 500 (SPY) over the past decade.
The hefty '2 and 20' fee structure (2% of managed assets and 20% of profits) adds to this underperformance and can significantly erode returns. Intense market competition has put this model under scrutiny.
For individual investors, the takeaway is clear: while hedge funds' dynamic strategies and potential for high returns are enticing, understanding their methodologies and the associated costs is crucial.
2. Top buys and top holdings in Q1
In early 2020, before the COVID rally and subsequent market collapse, I selected a list of 20 top-performing hedge funds, according to TipRanks. Their methodology was based on the alpha generated compared to the S&P 500. While this list will evolve, it’s a good starting point. Let me know if you’d like to see specific funds on this list.
So let's see what these funds, often featured in my social media feeds and podcast rotation, have been up to lately.
Remember, technology, communication, and consumer services represent most of the S&P 500, so it's not surprising to see these categories well represented in the list below.
Top 5 holdings at the end of March 2023:
The portfolios reveal the usual recurring themes:
☁️ Hyperscalers: AMZN, GOOG, MSFT.
⚙️ AI tech stack: META, NVDA, TSM.
💳 Payments: MELI, V.
Top 5 buys in Q1 (stocks they bought the most during the quarter):
This list reveals similar themes:
☁️ AI infrastructure: AMZN, GOOG, META.
⚙️ Semiconductors: ASML, AVGO, MRVL, TSM.
🌏 International: CPNG, NU.
☁️ Software: APP, CRM.
Take note of the subtle changes:
Google and Amazon at the top: Regular fixtures on this list, GOOG and AMZN took the top spot. They were top-5 buys for four of these funds this quarter. GOOG was notably the biggest addition at Tiger Global, Light Street, and Foxhaven. AMZN was the second-largest buy at Altimeter, Tiger Global, and Whale Rock.
AI remains the main story: Cloud infrastructure, leading LLMs, and powerful chips. That’s the recipe for the most recurring names on this list. But note that MSFT only shows up once.
Some new top picks: Applovin, Nu Holdings, Coupang, and Marvell appeared several times this quarter. If you don’t know Coupang, we recently published a deep dive for App Economy Portfolio members.
Missing after huge runs: NVIDIA was prominently featured last year but not so much since Q4 2023. The same goes for AMD, which was missing in action in Q1 2024 after being the top pick in the previous quarter.
Turnarounds: Tesla, Paypal, and Disney have seen their stocks dramatically underperform recently, but these hedge funds are not rushing to accumulate shares.
As a reminder, I intentionally ignore the top sells of these funds as they can be misleading. So often, the top sells include some of these money managers' highest conviction holdings that they're merely trimming for risk management purposes.
What else was noteworthy among other funds outside of my scope?
Pershing Square (Bill Ackman) entirely exited his Lowe’s position. He only owns 8 positions. Chipotle (CMG) and Restaurant Brands (QSR) remain the largest holdings.
Duquesne (Stanley Druckenmiller) cut its NVIDIA stake from 9% to less than 4% of the portfolio after a massive run (despite adding more in Q4 2023).
Buffett’s Berkshire Hathaway also submitted the latest 13F. While not a hedge fund, it’s a significant portfolio to track.
Apple trimming: The Oracle of Omaha trimmed his Apple position by 13% in Q1. As a result, Apple dropped from 50% down to a 41% allocation.
Chubb enters the portfolio: The other most notable move was the addition of insurance company Chubb Limited (CB) for the first time, a 2% allocation.
3. Case studies
Let's look at three companies that recently caught the big funds' eye.
Taiwan Semiconductor Manufacturing Company (TSM)
Strong AI demand: TSMC is a vital cog of the global semiconductor industry machine. The company beat revenue expectations, driven by surging demand for AI chips. However, concerns about consumer electronics demand led to a lowered 2024 growth outlook for the semiconductor market (excluding memory) to roughly 10%.
Pricing pressure: TSMC needs to ensure its pricing strategy captures the value of its advanced chips, especially with Intel catching up on the technology front. The company is planning to hike prices for customers who request chips produced outside of Taiwan.
Disclosure: TSM is a position in App Economy Portfolio.
Nu Holdings (NU)
New milestone: Nu is the largest digital banking platform outside of Asia. The company reached 100 million customers across Brazil, Mexico, and Colombia in April. Success hinges on converting a large, cash-heavy market into active financial product users.
Strong growth, but: Nu posted record revenue of $2.7 billion in Q1, fueled by expanding customer base and product offerings. And net income exceeded analyst estimates, reaching $379 million. However, the company acknowledges that growth is accompanied by rising delinquency rates, with non-performing loans increasing to 6.3% (>90 days). It’s a critical area to watch.
Disclosure: NU is a position in App Economy Portfolio. See our deep dive.
Coupang (CPNG)
Investment in future growth: Coupang is the top shopping platform in South Korea. The company plans to "continue investing billions of dollars" to expand fast delivery services and promote Korean products. The goal is to differentiate its offerings and solidify its lead. Coupang follows Amazon’s playbook, relentlessly innovating and focusing on growth over near-term profits.
E-commerce battle heats up: Coupang's Q1 revenue grew 23% to $7.1 billion, exceeding expectations. Organic growth was 33%, excluding currency and accounting adjustments. However, profits plunged due to losses from the recent Farfetch acquisition and fierce competition from Chinese rivals like AliExpress and Temu.
Disclosure: CPNG is a position in App Economy Portfolio.
4. Implications for individual investors
Hedge fund activities can be a gold mine of information, but they also come with additional caveats:
Diversify: Hedge funds don't put all their eggs in one basket. Spread your investments across various sectors and regions. You don’t have to bet the farm on a single company to generate wealth.
Look ahead: Many top funds invest with a future focus. They’re not swayed by today's headlines but by a company's potential in the next few years. It's a good reminder not to let daily market buzz cloud our long-term vision.
Dig deeper: Sure, hedge funds have teams diving into every detail of a company. But that doesn't mean you don’t need to do your homework. Read about your investments, stay updated, and trust but verify.
Watch the fees: Costs eat into profits. It sounds simple, yet many overlook this. As Jack Bogle said, "In investing, you get what you don't pay for. Costs matter." Always know what you're being charged.
Use filings as a starting point: Hedge funds' 13F filings can offer great insights but are not real-time updates. These are snapshots, sometimes old ones. Still, they're great conversation starters for your research.
Watching hedge funds can be instructive, but your investment journey is personal. Make informed decisions that suit your goals and risk appetite.
Bottom line
Successful investing is not just about emulating the 'smart money'; it's about aligning your portfolio with your unique financial goals and understanding the risks involved.
While most of us won't have the vast resources of a hedge fund, we possess something just as potent—the ability to invest with patience and a long-term vision.
Investing isn't about blindly following the herd. It's about carving your own path, armed with knowledge, patience, and a relentless pursuit of growth and learning.
That’s it for today.
Stay healthy and invest on!
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Disclosure: I am long AAPL, AMD, AMZN, APPN, ASML, CPNG, CRM, GOOG, HUBS, MELI, META, NU, NVDA, SE, SNOW, TEAM, TSLA, TSM, UBER, V in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.