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David Elliot Shaw (D.E. Shaw) founded D.E. Shaw & Co in 1988. Shaw started the fund as a quantitative fund (called “quant” fund), meaning that his strategy is to profit through small irregularities in market pricing, which he does by holding his positions for less than a few weeks at a time. Jim Simons employs the same strategy for his Renaissance fund (read about Renaissance), arguably one of the world’s best hedge funds.

D.E. Shaw actually invests in very large stocks which are usually very well researched and relatively efficiently priced. AAPL, GOOG, CAT, PG, XOM, CSCO, IBM, JPM, WMT, and COP are among his top 25 stock picks. Here are his top stock picks and their returns since June:

Company

Ticker

Value (x1000)

Activity

Return Since June

APPLE INC

AAPL

646339

-5%

14%

GOOGLE INC Puts

GOOG

592313

31%

4%

MYLAN INC

MYL

441067

2%

-22%

WARNER CHILCOTT PLC

WCRX

421844

-9%

-32%

CATERPILLAR INC Puts

CAT

320445

236%

-20%

GOOGLE INC

GOOG

308096

24%

4%

PROCTER & GAMBLE CO

PG

292992

74%

-1%

EXXON MOBIL Calls

XOM

228849

252%

-10%

ENDO PHARMACEUTICALS

ENDP

217240

-3%

-24%

BAIDU Puts

BIDU

217145

34%

0%

EXXON MOBIL CORP

XOM

204630

-5%

-10%

AMAZON COM Puts

AMZN

201177

50%

-3%

VERTEX PHARMA

VRTX

198152

-23%

-13%

VISA INC

V

186699

271%

2%

PHILIP MORRIS INTL

PM

185966

73%

4%

CITIGROUP Puts

C

183632

568%

-28%

CISCO SYSTEMS Puts

CSCO

182052

228%

-1%

IBM

IBM

180181

-14%

-1%

FORD MOTOR Puts

F

176374

5%

-25%

UNION PACIFIC CORP

UNP

175896

1%

-14%

NETFLIX INC Puts

NFLX

169540

40%

-16%

JPMORGAN CHASE & CO

JPM

166746

84%

-11%

WAL MART STORES INC

WMT

160194

721%

0%

CONOCOPHILLIPS

COP

158889

-45%

-12%

NETFLIX INC Calls

NFLX

158087

-17%

-16%

Shaw’s largest positions are consistent moneymakers. Apple Inc., Shaw’s largest position at $646 million, returned 14% since June, well above the S&P 500’s 10.6% loss for the same period. Apple is the most popular stock among hedge funds at the end of June (see the 10 most popular stocks). There were 103 hedge funds with Apple positions at the end of second quarter. They have invested a total of $11.4 Billion in the stock. Ken Griffin had $1 Billion in Apple calls and $211 Million in Apple stock, balanced by a $1 Billion put position. Rob Citrone’s Discovery Capital had more than $700 Million in AAPL at the end of June and didn’t protect itself against the downside by buying put options.

We can’t determine exactly what Shaw’s top stock picks returned because he had several options positions in his portfolio. One of the big put positions was in Caterpillar and the stock lost 20% since the end of June. He also bet nearly $200 Million on Ford put options and the stock lost 25% during the past two months. He also had nearly $200 Million in Citigroup puts and the stock lost 28%. These are amazing returns in a market that’s down nearly 11%.

However, Shaw has had some big losses since the end of last quarter. His position in the pharmaceutical company Warner Chilcott Plc. lost 32%, while his position in Mylan lost 22%. Simons is also a fan of Warner Chilcott (check out Simons’ top stock picks).

We like Shaw and his top stock picks appear to significantly outperform the market during the past two months. These are the times hedge fund investors cheer and significantly outperform the market. Hedge funds generally hedge their bets and you could partially see how D.E. Shaw has been hedging his long positions. Not only his top long stock pick had double digit positive returns, several of his large put positions made him money too. We believe investors can outperform the market over the long term by imitating David Shaw’s top stock picks.

Source: D.E. Shaw's Top Stock Picks