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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 Q4 update.
Today at a glance:
Hedge funds’ strategies.
Top buys and top holdings in Q4.
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 Q4 2023 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.
This underperformance is compounded by the hefty '2 and 20' fee structure (2% of managed assets and 20% of profits), which 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 Q4
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. I’ve made one change this quarter. Center Lake is out, replaced by Ole Andreas Halvorsen's Viking Global (one of the Tiger Cubs).
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 December 2023:
The portfolios reveal the usual recurring themes:
☁️ Hyperscalers: AMZN, GOOG, and MSFT.
⚙️ Semiconductors: AMD, NVDA, and TSM.
🌐 Global apps: META, UBER, and more.
💳 Payments: MELI and V.
Top 5 buys in Q4 (stocks they bought the most during the quarter):
This list reveals similar themes:
☁️ Hyperscalers: AMZN, GOOG, and MSFT.
⚙️ Semiconductors: AMD, ASML, and TSM.
🌏 Global commerce: MELI, PDD, and SQ.
☁️ Software: CRM, OKTA, and PCOR.
🩸 Medical devices: DXCM.
Take note of the subtle changes:
Top pick: AMD took the top spot, appearing five times in this list.
Some new entrants: Dexcom and Procore appeared several times this quarter. If you don’t know Procore, we recently published a deep dive for App Economy Portfolio members.
Missing after huge run-ups: NVIDIA was prominently featured in recent quarters but not so much in Q4. The same goes for Meta.
Turnarounds out: Paypal and Disney—two companies in turnaround mode featured in Q3—were also notably absent from this list this quarter.
Back in the fold: Conversely, Tesla and Apple were back as top buys for several funds after missing previously.
Semiconductors were once again a popular category for portfolio managers in Q4. To dive deeper, check out our latest video on our YouTube Channel. We dive into the critical leading semiconductor companies across foundries, fabless companies, and equipment manufacturers. We also cover design tools you might be overlooking.
Beyond semis, let's highlight a few more notable companies:
Amazon: AMZN is never too far from the most recurring pick among these funds. Of all the ‘Magnificent Seven, I often say that Amazon has the lowest margins and the widest moat. Same-day facilities expanded, and ‘Buy with Prime’ outside the walled garden makes the one-click checkout even more ubiquitous. Advertising has been accelerating across sponsored ads and Prime Video. Amazon Web Services (AWS) is involved in all layers of the AI tech stack, from custom chips for training and inference to apps like Codewhisperer, Amazon Q, and Rufus. I cover them in more detail in our deep dive into the latest quarter.
Pinduoduo: PDD was the most significant addition from Altimeter and Baillie Gifford in Q4. Apple recently revealed that Temu, the Chinese e-commerce app owned by Pinduoduo, was the most downloaded iPhone app in the US in 2023. According to a report from Bloomberg, shoppers spend almost twice as long on Temu as key rivals like Amazon. The company just splurged on several Super Bowl ads and offered $15 million in giveaways and coupons as part of the event. Temu aggressively targets US consumers, enticing them to “shop like a billionaire.” Pinduoduo has been on a tear and briefly overtook Alibaba in market cap in 2023. We previously covered everything you need to know about the company and its playbook.
MercadoLibre: At this point, MELI is one of the regular fixtures of this quarterly update. The company stands at the intersection of e-commerce and fintech in Latin America. Think of it as the Amazon.com and PayPal of LATAM, seamlessly combining retail and payment solutions. It may be a popular company among money managers, but it remains overlooked by most investors. Despite competition from Alibaba and Amazon, MELI continues to grow at breakneck speed.
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) cut most of his position in Lowe’s and increased its stake in real estate developer Howard Hughes (HHH), now a top 5 position. Chipotle (CMG) and Restaurant Brands (QSR) remain the largest holdings.
Duquesne (Stanley Druckenmiller) entirely cut its 4% stake in Alphabet started in the prior quarter and continued to add to NVIDIA in Q4.
Buffett’s Berkshire Hathaway updated its stock portfolio holdings. While not a hedge fund, it’s a significant portfolio to track. Apple was still 50% of the portfolio at the end of December. We compiled visuals of Berkshire’s top holdings here. 👇
3. Case studies
Let's look closer at two companies that recently caught the big funds' eye.
Advanced Micro Devices (AMD)
Data Center dominance: Like NVIDIA, the recent highlight is AMD's Data Center segment, with record sales of EPYC CPUs and Instinct GPUs, driven by cloud and AI adoption. In the latest quarter, this segment grew 43% sequentially, illustrating a surge in demand.
Client and Gaming headwinds: While Ryzen 7000 processors saw strong growth, overall Client segment revenue was flat sequentially, reflecting chip inventory corrections and a weaker PC demand. Gaming was at its lowest point in three years as we entered the later stage of the console cycle.
Strategic acquisitions: Recognizing future growth opportunities, AMD acquired Pensando Systems for $2 billion, boosting its data center networking capabilities, and Xilinx for $49 billion, expanding its reach into FPGAs (Field-Programmable Gate Arrays) and adaptive SoCs (System on Chips).
Investing in the future: R&D spending reached nearly $6 billion in 2023, demonstrating AMD's commitment to developing advanced chips and beefing up its software strategy to compete with NVIDIA.
Block (SQ)
Cash App still thrives: Cash App remained a bright spot for Block. Monthly transacting users were 55 million in September, up 11% year-over-year. Cash App Card reached 22 million, with 30% of those transacting daily. Both engagement and monetization per user showed an upward trend. As a result, Cash App's gross profit grew 27% year-over-year.
Square sees slower growth: The Square ecosystem faced pressure from entrenched players and new competitors. Q3 gross payment volume on Square grew 11% year-over-year, and revenue rose 12%. Square is exploring avenues like "Buy Now, Pay Later" and loyalty programs to differentiate itself.
Afterpay integration blues: The Afterpay acquisition hasn't delivered the expected results yet, leading to a restructuring. Integrating Afterpay with Cash App features could unlock long-term potential, but challenges remain. For now, the company will target further cost savings to turn profitable.
Outlook: Despite near-term hurdles, Block's strong Cash App base and expanding ecosystem remain promising. However, the market is still questioning the long-term potential, with the stock trading 75% off its 2021 peak.
These case studies illustrate the significance of broadening our investment research and adopting second-level thinking. Hedge funds often double down on businesses showing strong momentum but also invest in companies that may seem momentarily out of favor.
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, CRM, GOOG, ESTC, HUBS, INTU, MELI, META, MNDY, NFLX, NU, NVDA, PCOR, SE, SHOP, SNOW, SQ, 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.
Love the graphics and appreciate the inclusion of Guru comparison to SPY. Great information for investors.