💰 Inside Hedge Fund Buys in Q1
Greetings from San Francisco! 👋
Welcome to the new members who have joined us this week.
Join the 36,000+ How They Make Money subscribers receiving insights on business and investing every week.
Today, we’ll cover the following:
Hedge Fund Investment Strategies.
Top Buys in Q1.
Case Studies.
Implications for Individual Investors.
This article is brought to you by App Economy Portfolio.
I share my stock portfolio in real-time with a large private community of investors.
It’s called App Economy Portfolio. Members get the following:
Actionable stock ideas (deep dives).
Timely lists of stocks that are at the top of my watch list.
Live trade alerts (I invest a fixed amount monthly spread across 4 to 5 stocks).
I cover the earnings of 70+ companies in my portfolio every quarter and update my ratings accordingly in our private community chat.
Want to advertise in How They Make Money? Book here.
It was a 1997 dinner in New York City, where two of the most influential figures of our time found themselves in conversation.
Jeff Bezos, who had recently taken Amazon public, turned to Warren Buffett and asked a question that had been on his mind:
“Your investment thesis is so simple. You’re the second richest guy in the world, and it’s so simple. Why doesn’t everyone just copy you?”
Buffett, with his characteristic wit, responded:
“Because nobody wants to get rich slow.”
This exchange, as Bezos later recalled, underscored the value of patience and the constant, often misguided pursuit of quick wealth.
Legendary investors often have infinite resources and spend hours trying to make the very best decisions for their clients. As long as their time horizon and philosophy align with your approach, they can save you time and sharpen your selection process.
Copying reputable investors is a strategy known as following the ‘smart money.’ I’ve never really liked this term because even investors with significant funds and an excellent reputation still make mistakes. For example, look at the long list of reputable investors in the crypto exchange FTX. There is always a risk of groupthink and misplaced conformity. Smart money isn’t always smart, and no individual investor is exempt from making terrible decisions. Not even Uncle Warren.
With billions of dollars under management and access to sophisticated investment strategies, hedge funds are at the top of the food chain. By examining their top buys each quarter, we can glean insights into the sectors and specific stocks these financial juggernauts focus on.
Quarterly, fund managers with over $100 million in assets under management must reveal their portfolio positions within 45 days as part of their 13F filing. The filing includes what they bought or sold during the quarter, making it a precious source of information for those who pay attention.
This article will delve into the top buys from hedge funds in Q1 2023, shedding light on their investment strategies and the possible rationale behind their picks.
But before we begin, let’s cover some limitations of 13F filings:
13F filings don't provide a complete picture of the activities of smaller funds or individual investors with less than $100 million under management.
13F filings are submitted on a quarterly basis, 45 days after the end of each quarter. This means that the information in the filings might not reflect the fund's current holdings or the information may be outdated.
Not all assets are required to be disclosed on the 13F filings. The filing only includes equities that trade on U.S. exchanges, not bonds, commodities, or foreign stocks. This means that the full extent of a hedge fund's portfolio diversity might not be revealed in the 13F filings.
While the 13F filings disclose long positions, they do not disclose short positions or the hedge fund's cash holdings. This absence of information can provide a skewed perspective of the fund's strategy, as short positions often serve as a hedge against other investments. A long position could be a hedge against a short position.
In short, while 13F filings can be a valuable tool to observe trends and gain insights into the strategies of large institutional investors, they should be used with a clear understanding of what they do and do not reveal. As with any investment strategy, it's essential to conduct comprehensive research and consider multiple sources of information before making investment decisions and always consider the broader picture.
With all this said, let’s take a peek at what hedge funds were buying and holding in Q1 2023 and what we can glean from it.
1. Hedge Fund Strategies
Hedge funds are known for their sophisticated and diverse investment strategies. Their goal is to achieve high returns. And to do so, they may employ a range of techniques that span various asset classes and markets. Several key factors often influence these strategies and buying decisions:
Market Conditions: Broad economic trends can dictate whether hedge funds take long positions to capitalize on growth or lean towards short selling and other defensive strategies during downturns.
Sector Trends: Industry-specific trends can spur buying activity in certain sectors, particularly if these sectors are expected to benefit from shifts in consumer behavior or legislative changes.
Company Fundamentals: Hedge funds, like many investors, pay close attention to indicators of corporate health such as strong earnings growth, robust cash flows, and sound management.
Macro-Economic Factors: Larger economic trends such as interest rates, inflation, geopolitical issues, and policy changes can profoundly impact investment returns.
Quantitative Models: Many hedge funds use proprietary quantitative models to identify potential investment opportunities that a more traditional analysis might miss.
Risk Management: This involves diversifying investments across different asset classes, sectors, and geographies. If a particular asset class or sector becomes too risky, hedge funds may decide to reduce their exposure.
Investor Sentiment: Hedge funds may capitalize on overreactions to news events, buying stocks when they are undervalued due to negative sentiment and selling when they are overpriced due to excessive optimism.
While hedge funds have the potential to generate substantial returns, they are not without their risks. More often than not, you are better off with a low-cost ETF closely following the index.
For example, in the past ten years, the Global X Guru ETF (GURU), which follows some of the largest, most sophisticated hedge funds, has dramatically underperformed the S&P 500 (SPY).
Moreover, the traditional '2 and 20' fee structure often associated with hedge funds—2% of total asset value as a management fee and 20% of profits as a performance fee—can be a significant barrier for individual investors. Fees can prove expensive over time and erode returns. This model has been under pressure due to underperformance and increased competition.
Understanding these strategies and the associated costs is vital when considering hedge fund activity and its relevance to one's investment strategy.
2. Top Buys and top holdings in Q1
Investment decisions should not be influenced by anonymous voices claiming a company is overvalued based on trailing financial metrics on social media. Investing is about the future, not the past. Therefore, professional investors, whose careers depend on their decisions and have billions at stake, can offer a more reliable filter to separate the wheat from the chaff.
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 may evolve, it is a good starting point for deeper research. So let's see what these funds, often featured in my Twitter feed and podcast rotation, have been up to lately.
Remember, technology, communication, and consumer services represent 60% of the S&P 500, so it's not surprising to see these categories well represented in the list below.
Here are the hedge funds and their top 5 holdings at the end of March 2023:
The portfolios reveal some recurring themes:
☁️ Hyperscalers like AMZN, GOOG, and MSFT.
⚙️ Semiconductors like AMD, NVDA, and TSM.
📱 Global apps such as META, NFLX, and UBER.
💳 Payments like MA, MELI, and V.
🚘 EV companies, represented by TSLA.
Now, let's look at their top 5 buys during the quarter (stocks they bought the most between January and March 2023):
This list reveals additional themes:
☁️ Hyperscalers like AMZN, GOOG, and MSFT.
📱 Global apps like DUOL, META, and NFLX.
⚙️ Tech giants, especially AAPL and NVDA.
🌏 E-commerce platforms MELI and SE.
💻 Software company CRM also figures on this list.
Let's highlight a few notable companies:
Hyperscalers: The three cloud infrastructure giants are regularly at the top of the list due to their size. It's worth noting that Microsoft and Google were popular buys this quarter. Five funds made Microsoft and Google their top 5 buys, marking a shift in sentiment since Q4 2022. Could these funds' increased bullishness be tied to recent AI advancements?
Meta: Following Mark Zuckerberg's "Year of Efficiency" pitch in the Q4 FY22 earnings call, five funds added Meta to their top 5 buys. What makes Meta an attractive prospect for these funds?
Global e-commerce: Sea Limited and MercadoLibre, based outside the US and providing exposure to emerging markets, continue to be popular among these funds—more on these two in a minute.
Apple: Typically absent from this list, Apple made it this quarter, possibly indicating a flight to safety amid a challenging macro environment.
NVIDIA: A recurring name on this list, NVIDIA's position may spark debates about its valuation and long-term prospects. Your position on this may depend on your time horizon and risk profile.
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) made a significant investment in Google.
Duquesne (Stanley Druckenmiller) made significant investments in the three hyperscalers and NVIDIA, making MSFT and NVDA two of his three largest positions in the process.
While not a hedge fund, Buffett’s Berkshire Hathaway significantly increased his Apple position.
Let’s zoom in on some of these investments.
3. Case studies
To gain a more nuanced understanding of the specific factors that led hedge funds to invest in particular stocks during Q1, let's look at some of them.
Sea Limited (SE): Several high-profile hedge funds, such as Sands, Baillie Gifford, Light Street, and Maytech, marked Sea Limited as a top buy in Q1. This might be surprising given that the stock is trading more than 80% off its peak. The company's gaming arm, Garena, experienced a downfall after a surge during COVID due to the release of a popular mobile game (Free Fire). The resulting financial strain on Garena, the company's cash cow, is challenging as it funds other initiatives like e-commerce (Shopee) and fintech (SeeMoney). However, management is now focusing on cost efficiencies and profitability across all segments. Despite a potential short-term revenue growth slowdown, the upside potential in emerging markets remains significant. We previously discussed the company here.
MercadoLibre (MELI): A favorite among hedge funds in recent quarters, MercadoLibre is a fintech and e-commerce giant in LATAM, trading at a more attractive valuation, like most fintech these days. Despite impressive three-digit growth during COVID, the company has maintained an elevated revenue growth rate lately (+58% Y/Y in constant currency in the most recent quarter) and has been profitable through its rapid expansion. Notably, it's the largest holding at Baillie Gifford and Foxhaven and ranks within the top-five holdings at Sands Capital and Maytech, with Light Street also recently increasing their position.
Netflix (NFLX): Once an overlooked choice, Netflix is now regaining favor among investors. After a rocky start to 2022 with two consecutive quarters of declining paid subscriber growth, which led Bill Ackman (Pershing Square) to offload his shares at the time, the company's outlook seems to be shifting. The introduction of paid sharing and the recently added ad-supported plan could potentially enhance the average revenue per member. A more detailed discussion of their most recent quarter can be found here.
Observing the willingness of these hedge funds to invest in these companies during Q1, despite these stocks being out of favor, underscores the value of widening our research horizon and practicing second-level thinking.
4. Implications for individual investors
The buying activity of hedge funds can provide individual investors with a treasure trove of information. Individual investors can gain insights into market trends, undervalued stocks, and potentially lucrative investment opportunities. However, it's essential to interpret this information cautiously and in the context of one's investment strategy and risk tolerance. Here are a few key takeaways:
Diversify: Hedge funds typically have a diversified portfolio of investments, spreading their risk across different sectors, asset classes, and geographical regions. This strategy can help mitigate potential losses and generate more stable returns. You don’t have to bet the farm on a single company to generate wealth.
Think long-term: While some hedge funds engage in high-frequency trading, many successful funds take a long-term approach to investing. They invest in companies they believe have strong growth potential over several years. Individual investors can learn from this by focusing on the long-term prospects of their investments rather than getting caught up in short-term market fluctuations.
Do your research: Hedge funds employ teams of analysts who spend their days researching companies and market trends. But following them blindly is pointless. Holding a position for years requires conviction and a deep understanding of what you own. While individual investors may not have the same resources, doing your due diligence before making investment decisions is crucial. This can involve reading company reports, following market news, and using investment tools and resources.
Understand the Cost: Understanding the costs associated with any investment is essential. This includes brokerage fees, transaction costs, and any ongoing fees for managed funds. High management fees are the easiest way to underperform the index. To quote Jack Bogle, founder of Vanguard Group and a champion of low-cost investing:
"In investing, you get what you don't pay for. Costs matter."
So it’s less about mimicking the exact strategies employed by hedge funds and more about an entry point for discovery and additional research. And remember that there can be weeks or months of delay when trades are revealed in a 13F filing. So only money managers focused on multi-year time horizons are relevant.
As always, making investment decisions that align with your financial goals, risk tolerance, and investment horizon is crucial.
Bottom line
The world of hedge funds can often seem like a labyrinth, full of complex strategies and high-stakes decisions. However, for the observant individual investor, the moves of these financial titans can serve as a guiding light, illuminating potential opportunities and trends in the market.
Yet, remember to tread with caution. The insights gleaned from these institutions should serve as a starting point for your research, not an investment directive. Balancing their moves with your financial goals, risk tolerance, and a deep understanding of the companies you invest in is essential.
We've seen that even the 'smart money' isn't always smart. And while we may never have the vast resources of hedge funds at our disposal, we have something equally valuable – the power of patient, long-term investing.
Ultimately, our journey in the investment world is not about following in the footsteps of giants but about forging our own path, armed with knowledge, patience, and a keen sense of curiosity.
Remember Buffett's wisdom when Bezos asked him about copying his investing style. The secret isn't in the copying; it's in the patience and discipline.
So keep your eyes on the horizon, continue learning, and let your investment story unfold at its own pace.
That’s it for today!
Stay healthy and invest on!
Disclosure: I am long AAPL, GOOG, AMZN, V, TSM, META, NVDA, NFLX, SNOW, MELI, SE, JD, ROKU, HUBS, APPN, AMD, TSLA, ASML, INTU, TWLO, CRWD, DDOG in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members here.
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.
Hi, where would you subscribe to the stock portfolio following? Is it substack or seeking alpha? Thank you so much