A Hedge Fund Clone Portfolio For 2007

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Includes: AMX, AXP, CMCSA, MSFT, WU
by: M F

Quick, what's the most popular hedge fund holding?

Hint: They have a BIG software release coming up.

Sifting through the holdings of 15 value hedge funds - and limiting each fund to 20 holdings - results in roughly 300 positions. The number of stocks that were repeated X-times is below

1X = ~300
2X = 31
3X = 10
4X = 4
5X = 0
6X = 1, Microsoft (NASDAQ:MSFT)

With the help of a co-worker, I am currently delving through stacks of old SEC filings to backtest the Consensus portfolio. (Something to do when the Denver airport closes for two days.) We are taking a look at about 10 value funds since 2000, examining their holdings, and creating portfolios to see how our approach would have performed.

We first cull the list of stocks for each fund down to 20 names. We do this for a couple reasons. First, it eliminates any small positions, and it also equalizes the funds. (i.e. a fund with 100 names would be overrepresented vs. a fund with only 20 names). Second, hedge funds often have long positions in stocks they are actually short. This is called shorting against the box. The name comes from the idea of selling short the same stock that you are holding in your (safety deposit or strong) box. The term is somewhat meaningless today, with so many people holding stock in street name with their brokers, but the term persists. These positions are typically small, and taking the top 20 names, and consequently the consensus names, should eliminate most short positions.

Obviously our backtest will suffer from survivorship bias (we're not looking at any funds that have since gone out of business), but should give a pretty good indication of how the strategy would perform.

For the clone portfolio we will track in 2007, the year starts off with the following 15 names (repeated 3 or more times):

Apple Computer, Inc. (NASDAQ:AAPL) - Technology, Personal CPUs
Ameriprise Financial, Inc. (NYSE:AMP) - Financial, Asset Management
American Tower Corp. (NYSE:AMT) - Technology, Communications
America Movil Mexican company (NYSE:AMX) - Technology, Wireless
American Express Co. (NYSE:AXP) - Financial, Credit Services
Autozone, Inc. (NYSE:AZO) - Services, Auto Parts
Bed Bath & Beyond, Inc. (NASDAQ:BBBY) - Services, Home Furnishing
Comcast Corp. (CMCSK) - Telecommunications, Broadcasting & Entertainment
Coach, Inc. (NYSE:COH) - Consumer Goods, Textile/Apparel
Google, Inc. (NASDAQ:GOOG) - Technology, Internet Information Provider
Microsoft Corp. (MSFT) - Technology, Application Software
Qualcomm Inc. (NASDAQ:QCOM) - Technology, Communication Equipment
Tyco International (NYSE:TYC) - Technology, Diversified Electronics
Unitedhealth Group, Inc. (NYSE:UNH) - Healthcare, Plans
Western Union Co. (NYSE:WU) - Services, Personal Services

The holdings are heavily represented in technology, with under-representation in healthcare, energy and materials. These holdings have many more of the typical growth features [high ROE, ROA, EPS Growth] than value features [P/E, P/B]. The average market cap is around $40B, which is to be expected because of the size of the hedge funds. I will tack on the closing prices as of 12/31/2006. You can also track this portfolio here.

And the names repeated 4 or more times:

America Movil SA de CV (AMX)
American Express Company (AXP)
Comcast Corp. (CMCSK)
Microsoft Corp. (MSFT)
The Western Union Co. (WU)

And the names of all the repeats:

Apple Computer Inc. (AAPL)
Ameriprise Financial Inc. (AMP)
American Tower Corp. (AMT)
America Movil SA de CV (AMX)
Arbitron Inc. (NYSE:ARB)
American Standard Companies Inc. (ASD)
American Express Company (AXP)
AutoZone Inc. (AZO)
Bed Bath & Beyond Inc. (BBBY)
Baidu.com Inc. (NASDAQ:BIDU)
Comcast Corp. (CMCSK)
Coach Inc. (COH)
ConocoPhillips (NYSE:COP)
Cisco Systems Inc. (NASDAQ:CSCO)
Covanta Holding Corp. (NYSE:CVA)
Dell Inc. (NASDAQ:DELL)
Eaton Corp. (NYSE:ETN)
Federated Department Stores Inc. (FD)
First Data Corp. (NYSE:FDC)
Fidelity National Information Services Inc. (NYSE:FIS)
Flamel Technologies SA (NASDAQ:FLML)
Google Inc. (GOOG)
Hospira Inc. (NYSE:HSP)
International Game Technology (NYSE:IGT)
Cheniere Energy Inc. (NYSEMKT:LNG)
Lowe's Companies Inc. (NYSE:LOW)
LIVE NATION INC. (NYSE:LYV)
Marriott International Inc. (NYSE:MAR)
MDC Holdings Inc. (NYSE:MDC)
Martin Marietta Materials Inc. (NYSE:MLM)
Monsanto Co. (NYSE:MON)
NIKE Inc. (NYSE:NKE)
Nalco Holding Company (NYSE:NLC)
Omnicare Inc. (NYSE:OCR)
Qualcomm Inc. (QCOM)
Charles Schwab Corp. (NYSE:SCHW)
Sears Holdings Corp. (NASDAQ:SHLD)
Thermo-Electron Corp. (NYSE:TMO)
Tyco International Ltd. (TYC)
UnitedHealth Group Inc. (UNH)
WellPoint Inc. (WLP)
Walter Industries Inc. (NYSE:WLT)
Williams Companies Inc. (NYSE:WMB)
Wal-Mart Stores Inc. (NYSE:WMT)
The Western Union Co. (WU)