Mimicking the Top Holdings of Value Oriented Hedge Funds

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Includes: AAPL, JPM, PFE, VRX, WFC
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 institutional investors with a history of value investing (this "Value Masters" clone is a static option in AlphaClone and the managers were selected by them). The 17 institutions include Appaloosa Management, Berkshire Hathaway (NYSE:BRK.A), Tiger Global Management, Third Point, and Greenlight Capital.

Next, we can generate a list of the most popular holdings among the 17 managers. The list is updated quarterly and the portfolio was most recently updated on May 20th. The top 5 holdings are Apple (NASDAQ:AAPL), Valeant Pharma (NYSE:VRX), Pfizer (NYSE:PFE), JP Morgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC). To view the holdings and turnover from the first quarter, please view my previous update. Pfizer is currently a top holding in my High Yield Momentum Portfolio and has been in the portfolio since its inception in January.

If we then weight the top 10 portfolio based on the number of funds holding each stock, we get AAPL with an 18.9% weighting (7 managers hold the stock). VRX, PFE, and JPM all receive a 10.8% weighting with 4 of the 17 managers holding these stocks.

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:

Performance Statistics as of 2011-06-29



3 YEAR 5 YEAR INCEPTION
Total Return 26.8% 70.4% 317.1%
Annualized Return 8.2% 11.2% 13.2%
Annualized Volatility 21.9% 19.5% 17.2%
Click to enlarge

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