Top Holdings of Value-Oriented Hedge Funds

by: Scott's Investments

Once per quarter hedge funds and asset managers are required to file their holdings with the SEC. Using the equity disclosures of 17 hedge funds and mutual fund managers with histories of value investing we can gain a better understanding of where the "smart" value money has been investing in recent months. By analyzing the public disclosures of the institutional holdings, investors can, if they so choose, mimic the holdings of his or her favorite hedge fund(s).

To simplify the process, I use AlphaClone to generate a "Value" clone of the 10 most popular holdings of the following institutions (this "Value Masters" clone is a static option in AlphaClone and the managers were selected by them):

Appaloosa Management
Baupost Group
Berkshire Hathaway
Blue Ridge Capital
Dreman Value Management
Eminence Capital
Glenview Capital Management
Greenlight Capital
Lone Pine Capital
Maverick Capital
Pershing Square Capital Management
Private Capital Management
RBS Partners
Ruane, Cunniff & Goldfarg
Third Point
Tiger Global Management
Value Act Holdings
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Next, we can generate a list of the 10 most popular holdings among the 17 managers. The list is updated quarterly and most recently updated on February 21st:

Current Portfolio as of 2011-03-29


3/29/2011 2/21/2011
Citigroup Inc C $ 4.43 $ 4.91
Apple Inc AAPL $350.44 $350.56
Valeant Pharmaceuticals VRX $44.26 $40.47
JP Morgan Chase & Co JPM $45.96 $48.00
Alere Inc ALR $37.07 $37.99
CIT Group Inc CIT $42.40 $43.28
Express Scripts Inc ESRX $55.03 $56.77
Hewlett-Packard Co HPQ $42.14 $48.67
Cisco Systems Inc CSCO $17.19 $18.85
Microsoft Corp MSFT $25.41 $27.06
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The portfolio was weighted based on popularity. At the re-balance date six managers held C and AAPL (giving a 15% weighting to both stocks) while 4 held VRX, JPM, ALR, and CIT (10% weighting each). Three managers held ESRX, HPQ, CSCO, MSFT (7.5% weighting).

There are limitations to tracking institutional filings - for example, short equity positions are not disclosed. In addition, filings occur once per quarter so the filing and positions may no longer be held by the fund once the position becomes public knowledge. Thus, following the smart money has little value unless we can show there is a history of performance (even then, past performance does not guarantee future results). This is a key point for those who are concerned about the time lag between the public filings and the actual holdings.

Therefore, I put the "Value Masters" Clone to the test using AlphaClone's backtest tool. Below is the Value Masters clone history since 2000, using the top 10 holdings (popularity weighted), rebalancing quarterly:

Yearly Returns

Year Clone SP500 +/-
2000 30.2% -8.2% 38.4%
2001 2.4% -11.9% 14.3%
2002 -8.6% -22.1% 13.5%
2003 33.7% 28.7% 5.0%
2004 28.0% 10.9% 17.1%
2005 15.4% 4.9% 10.5%
2006 21.7% 15.8% 5.9%
2007 17.2% 5.5% 11.7%
2008 -32.8% -37.0% 4.2%
2009 56.8% 26.5% 30.3%
2010 15.0% 15.1% -0.1%
2011 3.8% 4.6% -0.8%
Performance Statistics as of 2011-03-29

Total Return 31.5% 66.5% 332.3%
Annualized Return 9.5% 10.7% 13.9%
Annualized Volatility 22.9% 19.4% 17.3%
Sharpe Ratio 0.2 0.3 0.6
Max Drawdown -39.3% -40.4% -40.4%
Average Turnover 45.0% 45.0% 45.0%
Alpha 7.4 8.3 12.6
Correlation S&P 0.9 0.9 0.8
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While not all of the holdings in the Value Master clone are considered traditional "value" stocks, the most popular holdings from these 17 value managers has a strong history of out-performance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.