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<< Return to Part 2

Hedge funds and institutional investors must publish their investment activity each quarter for all the world to see. There are many websites which will give you access to various degrees of this knowledge for your potential gain. What I am sharing is my personal belief about how best to use this information. The two main factors I use are as follows:

1. Net Market Value Bought. This is the total market value of an individual stock purchased by the professionals less any market value sold. Obviously larger is better, as it shows that a great deal of money was bought in that stock vs. sold. Each quarter I rank stocks and assign them a score from 0-100%, with 100% representing the largest market value bought stock, and 0 the worst. I do the same scoring for the 2nd factor:

2. Price drop as % (relative to global stock index). Since our information is delayed by approximately 45 days, and also the 3 month quarter, I subjectively select the most likely average price that each stock would have been purchased at by the pros, calculate the change from that price as a %, then assign a score from 0-100%, where 100% is a stock that has dropped by the most. The bottom line is that I prefer getting a stock that's gone down 20% vs. one that has gone up 20%, since I'm getting a better value for my purchase price. I throw out many stocks that clearly have already taken off to the upside. I'm not a trend follower. I seek stocks that I can buy cheaper than the pros have.

As I've disclosed in previous articles, the following chart shows my purchases using an imaginary $300,000 portfolio, and 1% per position resulting in amounts centered around $3,000. I simply invest more or less than $3,000 in accordance with how well the stock does in the two factors listed above. I then compare the returns I get vs. those I'd have gotten in the Vanguard Total World Index (VT).

Symbol

Bought

Sold

Pos Size ($)

Net Alpha vs VT

SLB

5/23/2011

$1,883

($41.35)

WFC

5/23/2011

$1,884

$13.01

COP

5/23/2011

$2,215

$199.08

GOOG

5/23/2011

$3,102

$804.22

AAPL

5/23/2011

$1,979

$524.61

CVX

5/23/2011

$2,527

$227.41

XOM

5/23/2011

$3,305

$272.31

JPM

5/23/2011

$3,531

($588.94)

PFE

5/23/2011

$2,302

$130.59

DIS

5/23/2011

$2,097

($93.09)

HCA

5/23/2011

11/22/2011

$1,514

($254.55)

MMI

5/23/2011

11/22/2011

$2,912

$2,133.33

COV

8/22/2011

$2,055

($148.04)

TEL

8/22/2011

$2,888

$340.23

AIG

8/22/2011

11/22/2011

$3,451

($190.95)

C

8/22/2011

$2,269

($340.06)

MOS

8/22/2011

$1,737

($333.93)

CTL

8/29/2011

$3,741

$340.55

CSX

8/29/2011

$4,102

$71.13

You'll note that 3 stocks have seen significant enough net market value sold that I've decided to sell from my portfolio (and therefore this portfolio). The following table shows the results:

net alpha all:

$1,570.90

stock return:

$477.13

stock return%:

1.93%

index return%:

-4.43%

net alpha %:

6.37%

In conclusion, beating the market by 6% over 6 months is phenomenal. It's less impressive when compared to the U.S. index, since the world index has done so poorly recently. And it's obviously highly dependent on MMI's huge alpha. But that's revisionist history, and I plan to continue gathering data until the sample size is stronger. Interestingly, hedge funds have been far from avoiding investing in Europe over the past 6 months. Checking the major indices and their hedge fund activity reflects that.

Here are this quarter's buys:

Pos Size ($)

MDT

$3,352

RDS.A

$3,416

ESRX

$4,102

V

$2,843

LVS

$3,332

COF

$3,827

BXP

$3,936

AMZN

$3,229

BIDU

$3,598

MSFT

$3,025

I took positions in these 10 stocks over the course of the past 3 trading days, and in accordance with those amounts as a percentage of my portfolio.

Source: Stock Ranking According To Hedge Fund Investing (Part 3)

Additional disclosure: I am long every stock mentioned in this article for approximately 1% of my portfolio, with the exception of the stocks listed as being sold in the first chart: AIG, MMI, and HCA.