This article is for education purposes only, and not to be taken as advice to buy/sell. Please do your own due diligence before committing to any trade/investment.
Best Performing Hedge Funds
Which are the best performing hedge funds of the past 3 years? While most people will be familiar with popular hedge fund names such as Berkshire Hathaway (Warren Buffett), Bridgewater Associates (Ray Dalio), Greenlight Capital (David Einhorn), Renaissance Technologies (Jim Simons), Pershing Square (Bill Ackman), these hedge funds are NOT among the top 20 best performing hedge funds over the past 3 years.
Among the branded hedge fund names, the top 3 best performing hedge funds are Tiger Management with an annualized return of 28%, followed by Pershing Square with an annualized return of 23% and in 3rd place is Duquesne Family Office run by Stanley Druckenmiller which generated an annualized return of 21% over the past 3 years.
The top 20 best performing hedge funds generated an annualized return of 30% and beyond over the past 3 years.
While I do not invest in any of the hedge funds due to their prohibitive cost structure, their 13F filings where these hedge funds are mandated to disclose their holdings and purchases/sales during the quarter are often a valuable source of new investment ideas.
While hedge funds are not required to hold their purchases for any predefined period, many of these funds invest with a multi-year time horizon. Hence, even if the 13F disclosure might already have lagged the initial purchase by a couple of months, these ideas often go beyond being just a “short-term punt” but a well-researched idea that could become a “long-term multi-bagger”.
So how do you select the right funds to follow and which ones to ignore? As can be seen, popular hedge funds are not necessarily the best-performing ones. Neither is the current best performing hedge funds guaranteed to replicate their stock selection performances in the future.
It makes sense to read the quarterly updates of these best performing hedge funds and see if their investing methodology is a strategy that fits your investment style and risk profile.
In this article, I will be highlighting the Top 20 best performing hedge funds and their annualized returns over the past 3 years, what are their current top 5 holdings (as of end-Q2 2021) in their respective funds and which are the Top 5 buys in the current quarter ended Q2 2021.
What best performing hedge funds were holding at the end of Q2 2021
Before we look at what the best performing hedge funds were buying in Q2 2021, let’s first focus on what is their top 5 core holdings in their portfolio, as of the end of June 2021.
Here is a summary of the best performing hedge funds (based on 3 years annualized returns) and the top 5 holdings by the fund. Data is taken from Hedge Follow.
Whale Rock, a $15bn fund that you probably have not heard of, tops the list of best performing hedge funds based on a 3-year annualized return of 43.01%.
Following closely behind is First Hand Capital, which generated a 3-year annualized return of 42.98% and Crosslink Capital, rounding up the top 3 with annualized returns of 42.36%.
The Top 20 best performing hedge funds have annualized returns of over 30%. The biggest hedge fund in this list based on AUM is Coatue Management with $25.52bn in AUM.
So which are the most popular holdings among these best performing hedge funds? If we rank companies by the number of times they appear in the top 5 holdings of the selected hedge funds and only keep the ones that appear at least 3 times, there are only 6 stocks that emerge from this list.
Most popular stocks held by the best performing hedge funds
All 6 counters are likely stocks that the man in the street can associate with, with CVNA likely the least well-known among the list of 6 stocks.
Among these 6 stocks, 5 of them fall under the theme of global e-commerce. They are Sea Ltd, Amazon, Shopify, Carvana and Mercadolibre (Amazon of South America).
The only “odd one out” is Facebook which is a counter that needs no introduction.
Carvana is a leading e-commerce company that sells used cars through an easy-to-use technology platform and the company is dubbed the “Amazon of Auto” by the Houston Chronicle.
It is quite evident that the global theme of e-commerce has help hedge funds generated strong returns over the past 3-years. These stocks remain as the core holdings for these hedge funds which goes to show that the e-commerce theme is still very much “in-play”.
What best performing hedge funds have been buying in Q2 2021
Let’s now take a look at what the biggest buys were for these funds during Q2 2021. The table below breaks down the top 5 buys for the Q2 2021 period.
There are only 3 stocks that appeared at least 3 times as the top 5 purchases of these funds in Q2 2021.
Despite Amazon and Facebook being already one of the most widely held blue-chip tech stocks among the best performing hedge funds, they are still considered “undervalued” and have been the top purchases by these funds in Q2 2021.
Another popular stock associated with the “work from home” trend (WFH), which has been among the top purchases by these funds is Peloton. Let’s take a closer look at Peloton.
Peloton business description
For those who are not familiar with Peloton (most likely you are not a gym junkie), the company operates an interactive fitness platform. It operates its business in three reportable segments: Connected Fitness Products, Subscription, and Other.
Connected Fitness Product revenue consists of sales of bike and tread and related accessories, associated fees for delivery and installation, and extended warranty agreements. Subscription revenue consists of revenue generated from monthly Connected Fitness Subscription and Digital Subscription.
Other revenue primarily consists of Peloton branded apparel. The company generates the majority of the revenue from the sale of Connected Fitness Products at the moment.
Peloton’s share price is now trading at approx. 37% from its previous high, with the stock suffering a large sell-off following a controversy with its Tread+ product.
Nonetheless, the company should not be seen as just a bike or treadmill manufacturer. One of its fastest-growing segments is its “subscription” segment where digital subscriptions grew by 404% to 891k, driven by free trial conversion rates. This is where Peloton makes money from users who don’t own a Peloton exercise bike or treadmill but uses its online classes.
This is where Peloton has demonstrated that it can convert users from a freemium model to a subscription model as users see the value of such subscriptions.
Here are some of the highlights of its Q3 FY2021 results:
- Connected fitness subscriptions grew by 135% YoY to 2.08m
- Digital subscriptions grew by 404% YoY to 891k
- Revenue grew by 141% YoY to 1,262m
- Connected fitness workouts ballooned from 44m to 149m in Q3 FY2021
- The gross margin was 35% (-12pp YoY) due to shipping investments
- Operating margin was -1% (+10pp YoY)
- Operational cash for 9MFY21 was $359m vs. $49m for 9MFY20
- Cash and cash-equivalent were at $2.7bn
The street was likely disappointed by the decline in gross margin (both on a YoY and QoQ basis) due to shipping investments made. Nonetheless, despite the substantial decline in gross margins on a YoY basis, Peloton was still able to show a drastic improvement in its operating margin due to better operating leverage.
This should be increasingly evident once the gross margin shows improvement in the coming quarters.
From a trading perspective, a short rather than long trade would be in play. This is also indicative from the stock’s bearish mode. Recent shorting signals had appeared in mid-August around $109/share. For scaling-in of positions, there were additional signals around $107/share and $102/share as well. Traders would remain in the trade as the TradersGPS system has yet to indicate exit signals. At PTON’s current price of $100.90/share, this is still a profitable trade to have executed.
It is almost impossible for the man-in-the-street to get access to hedge funds, more so for the best performing ones. However, that does not necessarily mean that retail investors cannot get the best ideas from these hedge funds, who are mandated to report their holdings and purchases every single quarter.
One can build his/her portfolio using ideas gleaned from these best performing hedge funds, without the need to sacrifice 20% of your alpha in performance fees, which are often structured as a major remuneration component when these hedge funds generate a certain level of returns.
If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.
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