💰 Hedge Funds' Top Picks in Q2
💰 Hedge Funds' Top Picks in Q2
AI favorites, UnitedHealth, and a new spin-off
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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 Q2 update.
Today at a glance:
Hedge funds’ strategies.
Top buys and top holdings in Q2.
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 Q2 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 Q2
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. It’s not perfect, but 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 that these categories are well represented in the list below.
Top 5 holdings at the end of June 2024:
The portfolios reveal the usual suspects. The ten stocks below represent nearly two-thirds of the top holdings:
☁️ Hyperscalers: AMZN, GOOG, MSFT.
⚙️ AI tech stack: AMD, META, NVDA, TSM.
💳 Payments: MA, MELI, V.
Top 5 buys in Q2 (stocks they bought the most during the quarter):
This list reveals similar themes, with some new entries:
☁️ AI infrastructure: AMZN, GOOG.
⚙️ Semiconductors: AVGO, QCOM, TSM.
💻 Software & Hardware: AAPL, ADBE, DELL.
🌏 International: CPNG, MELI, SE.
⚡️ Energy: GEV, CEG.
Take note of the subtle changes this quarter:
UnitedHealth (UNH) was the star of the show: Both Tiger Global and Lone Pine started prominent positions in UNH during the quarter (5.5% and 3.9%, respectively). In addition, Route One, Eagle, and Baillie Gifford added to their existing position.
Apple back at the top: While often shunned by top hedge funds in recent years, the Cupertino giant was one of the top picks at Altimeter, Sands, Light Street, and Atreides. While Buffett was selling, these funds were buying more.
Buying the entire AI tech stack remains the main story: Powerful chips, cloud infrastructure, leading LLMs, and innovative apps. That’s the recipe for the most stocks on this list. Alphabet (GOOG), Amazon (AMZN), TSMC (TSM), Broadcom (AVGO), and Qualcomm (QCOM) were all recurring names. However, note that Microsoft (MSFT) was absent.
Adobe makes an entrance: Adobe (ADBE) has been at the forefront of AI apps with Firefly and GenStudio. It was a top pick at Viking, Atreides, and Appaloosa. We discussed the impact of generative AI on Adobe’s business here.
New energy picks: GE Vernova (GEV), spun off from GE in April 2024, was one of the most recurring names. Constellation Energy (CEG) was also a top pick at Night Owl, Lone Pine, and Coatue.
International commerce is still a favorite theme: MercadoLibre (MELI), Sea Limited (SE), and Coupang (CPNG) show that these funds invest beyond the United States.
Running out of steam: NVIDIA (NVDA) was prominently featured last year but not so much in 2024. AMD and ASML were also missing in action.
Turnarounds: Sometimes, we learn more from what these funds are not buying. Tesla (TSLA), Paypal (PYPL), and Disney (DIS) have seen their stocks underperform in 2024, but these hedge funds are not buying so far.
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) trimmed his positions in Chipotle (CMG) and Alphabet (GOOG), which remain in his top holdings alongside Hilton (HLT) and Restaurant Brands (QSR). He notably started new positions in Brookfield (BN) and Nike (NKE).
Duquesne (Stanley Druckenmiller) cut his Microsoft (MSFT), and Coupang (CPNG) holdings by more than half. They were previously his two largest positions.
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 cut his Apple position nearly in half. As a result, Apple dropped to a 31% allocation.
Deep cuts: The other most notable move was that Berkshire entirely exited stakes in Snowflake (SNOW) and Paramount (PARA).
Small new entrants: Berkshire invested in Ulta Beauty (ULTA), but keep in mind that it’s a 0.1% position.
3. Case studies
Let's look at the two companies that appeared the most on the top buys list in Q2.
UnitedHealth (UNH)
Surfing the GLP-1 wave: Weight loss and diabetes management present a lucrative opportunity for the health insurance behemoth. Funds likely recognized UNH's potential to capitalize on this trend through coverage decisions and strategic partnerships.
Cyberattack: While initially disruptive, the ransomware attack on Change Healthcare earlier this year may have inadvertently created a buying opportunity. The company is facing short-term headwinds, but management maintained its adjusted EPS forecast.
GE Vernova (GEV)
April spin-off: GE Vernova's sudden prominence among top hedge fund buys is mainly due to its spin-off from General Electric (GE) during the quarter. This strategic move automatically granted GE shareholders a stake in GEV, instantly placing it in the portfolios of numerous institutional investors. The spin-off, intended to streamline GE's operations and unlock value, has drawn attention to its potential as a standalone entity in the energy sector.
Renewables in the spotlight: GE Vernova is poised to capitalize on the growing demand for renewables. The company's focus on grid solutions, renewable energy, and energy storage aligns with the global push towards decarbonization. Management expects its Electrification segment to drive mid-to-high teens organic revenue growth in 2024, with expanding margins.
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: 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, ADBE, AMD, AMZN, APPN, ASML, BABA, CPNG, CRM, CRWD, ESTC, GLBE, GOOG, HUBS, IOT, MELI, META, NFLX, NU, NVDA, SE, SNOW, TEAM, TSLA, TSM, UBER, and 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.