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Goldman Sachs recently published its Hedge Fund Trend Monitor report. The report discusses a strategy of investing in hedge funds' most favorite 20 stock picks. According to Goldman Sachs, this strategy managed to beat the market by 271 basis points per quarter during the past 10 years. This is more than 10 percentage points annualized. Here is what they said:

The strategy of buying the 20 most concentrated stocks has a strong track record over more than 10 years. We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. Since 2001, the strategy has outperformed the market 69% of the time by an average of 271 bps per quarter (not annualized). The back test suggests that this strategy works in an upward trending market but tends to perform poorly during choppy or flat markets. The “most concentrated” hedge fund ownership basket has underperformed the S&P 500 in 2011 YTD by 62 bps (1.2% vs. 1.8%).

Here are the 20 stocks hedge funds are crazy about at the end of September:

  1. Dollar Thrifty (NYSE:DTG): Hedge funds own 73% of outstanding shares. Matthew Halbower’s Pentwater Capital has the largest stake in the company among the 350+ hedge funds we are tracking.

  2. Charter Communications (NASDAQ:CHTR): Hedge funds own 44% of outstanding shares. Jonathan Jacobson’s Highfields Capital has the largest stake in CHTR.

  3. Lyondell Basell (NYSE:LYB): Hedge funds own 40% of outstanding shares. Andreas Halvorsen had more than $300 million in LYB at the end of September.

  4. Visteon (NYSE:VC): Hedge funds own 37% of outstanding shares.

  5. Sunoco (NYSE:SUN): Hedge funds own 24% of outstanding shares.

  6. Crown Castle (NYSE:CCI): Hedge funds own 23% of outstanding shares.

  7. Williams Cos (NYSE:WMB): Hedge funds own 23% of outstanding shares.

  8. Expedia (NASDAQ:EXPE): Hedge funds own 18% of outstanding shares.

  9. Lear Corp (NYSE:LEA): Hedge funds own 18% of outstanding shares.

  10. CIT Group (NYSE:CIT): Hedge funds own 17% of outstanding shares.

  11. Valeant Pharma (NYSE:VRX): Hedge funds own 16% of outstanding shares.

  12. Liberty Interactive (LINTA): Hedge funds own 15% of outstanding shares.

  13. Ensco Plc (NYSE:ESV): Hedge funds own 15% of outstanding shares.

  14. News Corp (NASDAQ:NWSA): Hedge funds own 14% of outstanding shares.

  15. Yahoo (NASDAQ:YHOO): Hedge funds own 11% of outstanding shares. Dan Loeb initiated an activist position during the third quarter and had more than $600 million invested.

  16. Macy’s (NYSE:M): Hedge funds own 11% of outstanding shares.

  17. Anadarko Petroleum (NYSE:APC): Hedge funds own 9% of outstanding shares.

  18. WellPoint (WLP): Hedge funds own 8% of outstanding shares.

  19. Baidu (NASDAQ:BIDU): Hedge funds own 7% of outstanding shares.

  20. Visa Inc. (NYSE:V): Hedge funds own 7% of outstanding shares.

Most people will probably be surprised that Apple (NASDAQ:AAPL) didn’t make this list. Apple’s market cap is $350 billion. If hedge funds invested $25 billion in the stock it would have made the list. Hedge funds’ total investment in the company is only $14 billion. That’s why it didn’t make the list. The stocks that made the list usually perform better in up markets but they still beat the market in flat markets. The reason the strategy doesn’t work as well in down markets is that hedge funds tend to liquidate some of their holdings during sharp sell-offs. However, this is a low turnover strategy for long-term investors and it beats the market on the average by a large margin.

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

Source: 20 Top Hedge Fund Holdings As Of September