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What are we looking for?

As floods of new investors continue opening trading accounts and investing this tumultuous year, where better to start than by analyzing where some of the top investors in the business are putting their money to work?

The largest North American hedge fund management firms disclose where their money is invested via quarterly 13-F regulatory filings. Let’s identify where titans such as Renaissance Technologies LLC and Two Sigma Advisers LP are placing their bets by analyzing these filings and looking for themes.

The screen

To begin our analysis, we used FactSet’s Universal Screening tool to pull out all North American hedge funds that hold equity assets of more than US$1-billion.

We then narrowed our universe, excluding funds that have a FactSet Holdings Turnover categorization of “very high” or “high,” to filter out funds that may be trading in and out of positions frequently. Lastly, we only included funds that have publicly reported their June 30 holdings, to ensure our data are as up to date as possible.

This left us with 118 hedge funds to conduct our analysis.

To give us an indication of where hedge fund managers have the highest conviction, we singled out the top 10 equity holdings for each of the 118 hedge funds and compiled a list of companies that made the most top 10 appearances.

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What we found

It is evident that hedge fund managers favour “growth” stocks, as nine of the 10 stocks with the highest number of appearances tend to share similar characteristics, such as high projected growth rates and high valuation multiples. They participate in long-term, technological growth trends such as cloud computing, e-commerce and payment processing. Additionally, these nine companies (the outlier is utility PG&E Corp.) have outperformed the S&P 500 year-to-date, with an average return of 33 per cent.

Megacap technology led the way, with Inc. appearing 28 times in the top 10 holdings of our 118 hedge funds. Amazon was closely followed by Facebook Inc. (24 appearances) and Microsoft Corp. (20).

While Apple Inc. did not make our top 10 list, it was still widely held with eight appearances and tied for 11th place in this ranking. Apple is a more mature company that no longer fits the growth category as well as some of the other technology companies on our list, which may explain its placement just outside the top 10.

PG&E, the non-tech outlier, is engaged in generation, transmission and distribution of electricity and natural gas. While hedge fund managers appear to be largely avoiding the energy sector, PG&E does offer some interest. It displays characteristics of a value company, with a low price-to-earnings ratio, negative earnings per share growth and poor stock performance so far this year, at minus 11.3 per cent.

The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above. Please also note that because 13-F filings are disclosed quarterly, these hedge funds may no longer hold said positions.

Top holdings of North American hedge funds 

RankCompanyTickerFactSet SectorAppearances in Top 10 Hldgs.Mkt. Cap. (US$ Mil.)P/E LTM1Y Estim. EPS Grth. (%)*Div. Yld. (%)YTD Ttl. Rtns. (%)Recent Close (US$) Inc.AMZN-QRetail Trade281,554,245.6109.9x 32%n/a 67.93,102.97
2Facebook Inc.FB-QTech. Services24639,899.735.3x 24%n/a 29.7266.15
3Microsoft Corp.MSFT-QTech. Services201,554,471.634.8x 12%1.0 31.3205.41 Inc.CRM-NTech. Services15224,442.471.3x 25%n/a 51.6246.64
5Alibaba Group (ADR)BABA-NRetail Trade13741,615.033.0x 26%n/a 29.2274.10
6Alphabet Inc. (Class A)GOOGL-QTech. Services11960,239.0033.0x -10%n/a 12.71,508.83
7Alphabet Inc. (Class C)GOOG-QTech. Services11960,239.0033.2x -10%n/a 13.61,519.28
8PG&E Corp.PCG-NUtilities1118,715.84.2x -59%n/a -11.39.64
9Netflix Inc.NFLX-QCons. Services10210,038.085.0x 51%n/a 47.2476.26
10Mastercard Inc.MA-NFinance9336,072.648.4x -14%0.5 13.9338.60

Source: FactSet

*Based on analyst consensus estimates.

Arjun Deiva, CFA is vice-president at FactSet’s Canada consulting division.

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