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It's that pivotal time of the quarter again! Hedge funds just shared their portfolio moves in Q2 as part of their 13F filings.
Today at a glance:
Hedge Fund Investment Strategies.
Top Buys in Q2.
Case Studies.
Implications for Individual Investors.
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In the insightful book The Money Game, Adam Smith wisely remarked:
"If you don't know who you are, [the stock market] is an expensive place to find out."
The key to savvy investing is self-awareness. Your goals, time horizon, and risk appetite are unique. It's perilous to mirror someone else's investment strategy without introspection.
Learning from successful investors is invaluable, but blindly replicating their trades can be fraught with pitfalls.
For the NBA fans among us, you might recall critics claiming that Steph Curry “ruined the game” because young players, inspired by his flair, attempted and often missed audacious 3-pointers. If mimicking Curry's prowess on the court often leads to disappointment when tallying the final score, why should we expect a different outcome when emulating financial giants in the investment realm?
A case in point is Michael Burry (of The Big Short fame). I couldn’t help but chuckle at a recent tweet noting that Burry had predicted “20 of the last 2 market selloffs.” Emulating his financial maneuvers can be dicey. Often, by the time we catch a glimpse of Burry's portfolio, he's several steps ahead, having recalibrated his strategies.
While mirroring leading investors — known as ‘following the smart money’ — might sound strategic, remember, even financial gurus falter. No one, not even legends like Warren Buffett, is impervious to blunders.
Hedge funds, the apex predators of the financial ecosystem, offer intriguing insights through their portfolios. Their 13F filings, mandatory for funds managing over $100 million, can be goldmines of trends and strategies, albeit with a caveat.
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.
Overall, while 13F filings can offer glimpses into the mighty world of hedge funds, they're not the complete picture. It's crucial to forge your own opinion and investment thesis.
With all this said, let’s take a peek at what hedge funds were buying and holding in Q2 2023 and what we can glean from it.
1. Hedge Fund 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: Economic trends are key. During bull markets, hedge funds might take long positions to ride the wave, while bear markets might see them employ short selling or other defensive maneuvers.
Sector trends: Shifts in industries, whether driven by consumer behavior or legislative reforms, can spur specific buying patterns.
Company fundamentals: Much like any prudent investor, hedge funds aren't blind to corporate indicators. A company's earnings, cash flow, and management quality often become deal-breakers.
Macroeconomic factors: The broader picture matters. Elements like interest rates, geopolitical events, or policy shifts can sway hedge fund decisions.
Quantitative models: Many hedge funds rely on their secret sauce—proprietary models—to spot opportunities that traditional analyses might overlook.
Risk management: It's not all about returns. Hedge funds also play defense, diversifying across sectors and regions to shield themselves.
Investor sentiment: The market's mood swings can be lucrative. Negative news might lead to undervalued stock gems, while a euphoric market can present selling opportunities.
Yet, it's not all rosy. Despite their potential, hedge funds come with their own set of pitfalls. For instance, over the past decade, the Global X Guru ETF (GURU), which tracks some of the heavyweight hedge funds, hasn't kept pace with the S&P 500 (SPY).
And then there's the price of admission. The traditional '2 and 20' fee structure—2% of total assets and a whopping 20% of profits—can drain individual investors. Not to mention, with hedge funds often underperforming and facing intense competition, this fee model has come under scrutiny.
So, while hedge funds present a fascinating world of high returns and dynamic strategies, it's crucial to understand their approach and costs.
2. Top Buys and top holdings in Q2
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 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 social media feeds and podcast rotation, have been up to lately.
Remember, technology, communication, and consumer services represent the majority 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 June 2023:
The portfolios reveal some recurring themes:
☁️ Hyperscalers like AMZN, GOOG, and MSFT.
⚙️ Semiconductors like AMD, NVDA, and TSM.
📱 Consumer tech such as AAPL, and TSLA.
🏠 Specialty retail like BBWI and RH.
💳 Payments like MELI and V.
Now, let's look at their top 5 buys during the quarter (stocks they bought the most between April and June 2023):
This list reveals additional themes:
🤖 AI with AMZN, GOOG, META, and MSFT.
⚙️ Semiconductors like AMD and NVDA.
📱 Global apps from AAPL to NFLX.
💻 Software companies like MNDY and CFLT.
💳 Fintech like PYPL and SQ
Let's highlight a few notable companies:
NVIDIA: One of the hottest stocks of 2023 also remains one of the most popular among hedge funds. NVIDIA's position may spark debates about its valuation and long-term prospects. Your opinion on the stock may depend on your time horizon and risk profile. While my entire social media feed was populated by anonymous accounts voicing their concerns about NVIDIA’s valuation in Q2, these funds were doubling down.
Meta (Facebook’s parent company): Five funds added Meta as a top buy, celebrating its 'Year of Efficiency.' From the announcement of the new version of its open-source AI model Llama 2 to the successful launch of Instagram Threads, Meta has impressed with a growth acceleration in its latest quarter. We cover this in detail in the article linked below.
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 Amazon were once again popular buys this quarter. Four funds made Microsoft and Amazon their top 5 buys. Conversely, Google only cracked the top 5 once, as a top pick by Light Street.
Apple: Typically absent from this list, Apple made it for the second consecutive quarter, possibly indicating a flight to safety amid a challenging macro environment.
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) continued to increase its position in Alphabet, making it a top 5 position if we include both tickers (GOOG and GOOGL).
Duquesne (Stanley Druckenmiller) doubled down on NVDA, which has become the largest holding of the portfolio.
While not a hedge fund, Buffett’s Berkshire Hathaway also shared its portfolio holdings. Apple grew to 51% of its stock portfolio at the end of June.
In the next section, we'll dive into specific investments, reviewing why these hedge funds might be backing these choices
3. Case studies
To gain a more nuanced understanding of the specific factors that led hedge funds to invest in particular stocks during Q2, let's look at some of them.
Eli Lilly (LLY)
The leading pharmaceutical company recently garnered significant investor attention with the surge in demand for its diabetes drug, Mounjaro. The drug's sales jumped 72% sequentially, reaching $1 billion in Q2. This leap in demand is not just for diabetes treatment; many anticipate Mounjaro's approval as a weight-loss drug, and it is already being prescribed off-label for obesity.
Adding to this momentum, there's positive buzz around another of Lilly's experimental drugs, donanemab for Alzheimer's. Now the world's most valuable healthcare company (surpassing UnitedHealth), Eli Lilly stands as the 10th largest company globally. The company raised its projected adjusted 2023 earnings to $9.80 per share in the mid-range, 12% ahead of consensus.
Live Nation Entertainment (LYV)
It’s Taylor Swift’s world, and we are living in it. Her ‘Eras’ tour could break $2 billion in North American ticket sales alone.
The parent company of Ticketmaster reported impressive second-quarter results, significantly exceeding Wall Street's expectations. Driven by heightened demand for concert tickets and performances by major artists such as Taylor Swift and Beyonce, the company experienced a 27% spike in revenue, reaching $5.6 billion, 14% ahead of consensus. This strong financial performance primarily resulted from their concerts business, which brought in about $4.6 billion, and ticketing, which contributed $709 million. Even though the total estimated events decreased slightly by 2.4% Y/Y, the fan turnout nearly doubled from the previous quarter, with 37 million fans attending Live Nation's shows.
However, the company faced challenges, such as the backlash over canceling ticket sales for Taylor Swift's tour due to website overload and pausing sales in France due to a glitch. To further enhance its customer experience, starting in September, Live Nation plans to introduce an all-in pricing model for concerts at its venues and festivals in the US, allowing fans to see upfront the full ticker price, including fees.
Alibaba (BABA)
Alibaba saw a rebound in revenue growth, reaching 234 billion yuan ($32 billion), a 14% increase from the previous year. This outperformance is attributed to a focus on affordable products and a boost from the 618 shopping festival in June.
However, the e-commerce titan faces competition from rivals like Pinduoduo and ByteDance's Douyin (TikTok in China). While Alibaba's Cloud Intelligence Group saw modest revenue growth, its profit more than doubled due to efficient tools like Dingtalk. CEO Daniel Zhang will step down in September to focus on Alibaba's cloud division, with Eddie Yongming Wu taking the helm.
This positive earnings report follows Alibaba's strategic restructuring into six units aimed to ease regulatory concerns. For more about the new organization, we got you covered here. 👇
Witnessing the large investments of hedge funds in Q2 underscores the value of widening our research horizon and practicing second-level thinking. Many portfolio managers are willing to invest in businesses that may appear out of favor, at least temporarily.
4. Implications for individual investors
Hedge fund activities can be a gold mine of information, but they also come with caveats. Here's what we can glean from their moves and how we might apply these lessons:
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 they're not real-time updates. These are snapshots, sometimes old ones. Still, they're great conversation starters for your research.
In essence, watching hedge funds can be instructive, but your investment journey is personal. Make informed decisions that suit your goals and risk appetite.
Bottom line
While hedge funds offer a treasure trove of insights, they're just the beginning of your research journey, not the end-all. Investing successfully means understanding your financial aspirations and the inherent risks of the market.
It's worth remembering: even the 'smart money' has its off days. 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.
Our investment journey isn't about walking in the footsteps of giants; it's about forging our own path. It's fueled by knowledge, patience, and an insatiable curiosity.
So set your gaze on the distant horizon, never stop learning, and let your investment narrative evolve organically.
That’s it for today!
Stay healthy and invest on!
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Disclosure: I am long AAPL, AMD, AMZN, APPN, ASML, BABA, DDOG, GOOG, HUBS, INTU, JD, LYV, MELI, META, MNDY, NET, NFLX, NVDA, SNOW, SQ, TEAM, TSLA, TSM, UBER, V 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.