Hedge Fund Best Ideas and Consensus Follow-Up

In late 2006 I proposed tracking a portfolio of 10 hedge fund managers I considered to be great stockpickers. It sounded good to me in theory, but I always like to let the data speak for itself. I went and backtested two strategies based on their 13F filings:

Top Holdings – This selected the top 2 holdings from each manager to form a portfolio of 20 holdings.
Consensus – This selected the most popular ten holdings among the managers.

The ten managers were:

Baupost Group
Blue Ridge Capital
Warren Buffett
Eminence Capital
Greenlight Capital
Lone Pine Capital
Maverick Capital
Okumus Capital
Private Capital
Tiger Global

This process literally took me and a co-worker a month to complete by hand. I found that these two naive strategies of piggybacking on top managers outperformed the market by roughly 6-12% a year (depending on the index you compared them to). Now that we have AlphaClone online, I thought it would be instructive to take a look at the performance, including out of sample returns in 2007 and 2008.

The tables below show results consistent with the backtests – namely outperformance of 9% to 13% per year. I find that amazing given that at least one of these managers has shut down. Any suggestions on who to replace Okumus with? Appaloosa?

However, they are not absolute return portfolios, but rather relative strategies looking to outperform the market. This can be seen in the high volatility (these are annual vol numbers, monthly annualized would be a little lower), high drawdowns, and high correlation to the market. An investor looking to have a more balanced portfolio could hedge out some or all of the market risk. In the below example we use a simple 50% index hedge that excludes any short rebates. Returns are higher due to the terrible S&P returns this decade, risk adjusted returns are higher, and drawdown and correlation decrease.

What would the portfolios look like today?

Top 2 holdings:

Wells Fargo (WFC)
Coca Cola (KO)
America Movil (AMX)
Qualcomm (QCOM)
American Tower (AMT)
CSX Corp (CSX)
Hewlett Packard (HPQ)
Apple (AAPL)
First Solar (FSLR)
Oracle (ORCL)
Helix Energy (HLX)
Berkshire Hathaway (BRK.A)
Grupo Televisa (TV)
News Corp (NWSA)
Microsoft (MSFT)
Target (TGT)
PDL Biopharma (PDLI)
McGraw Hill (MHP)
Cadence Design (CDNS)

Most Popular Holdings:

Visa (V)
America Movil (AMX)
Qualcomm (QCOM)
Priceline (PCLN)
American Express (AXP)
Echostar (SATS)
Hansen (HANS)
Teradata (TDC)
International Gaming (IGT)