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Is This The Best Idea These Hedge Funds Can Come Up With?

Inan Dogan, PhD

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on September 30th. We at Insider Monkey have made an extensive database of 752 of those established hedge funds and famous value investors' filings. Only a small percentage of these hedge funds are truly talented, and only a small percentage of these hedge funds' ideas are truly exceptional. We have been following hedge funds' moves since 2012 and our database extends all the way back to 1999. So, we have 20 years of detailed hedge fund holdings data. Our analysis revealed that hedge funds' top consensus picks delivered market beating returns. In this article we are going to focus on one of these consensus picks, Berkshire Hathaway Inc. (NYSE:BRK-B), and then compare it against Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), Visa Inc (NYSE:V), and JPMorgan Chase & Co. (NYSE:JPM). All of these stocks are in the same market cap cluster.

Berkshire Hathaway Inc. (NYSE:BRK-B) has been experiencing an unfathomable increase in enthusiasm from hedge fund managers since early 2018. BRK-B was in 99 hedge funds' portfolios at the end of the third quarter of 2019. There were 93 hedge funds in our database with BRK-B holdings at the end of June. Our calculations also showed that BRK-B now ranked 12th among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. Our research has shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_607931" align="aligncenter" width="600"] Bill Ackman of Pershing Square[/caption]

Bill Ackman of Pershing Square

Even though hedge funds' consensus picks beat the market on average, some of these stock picks fail miserably. We think Berkshire Hathaway Inc. (NYSE:BRK-B) is destined to underperform the market. We don't understand why a hedge fund manager who charges his investors 2% of their assets and 20% of their returns invests this money in another manager's hedge fund. Warren Buffett's Berkshire Hathaway is really a hedge fund that doesn't any performance fees and minimal management fees. Hedge fund trend of investing in Berkshire Hathaway increased after Bill Ackman disclosed a position in Berkshire Hathaway. Anyone can directly go ahead and can buy Berkshire Hathaway shares. Is this really the best investment idea Bill Ackman can come up with? If so, then he is really sending his investors the message that they must be fools for paying him hefty fees when they can go ahead and invest in Berkshire Hathaway by themselves.

Hedge fund activity in Berkshire Hathaway Inc. (NYSE:BRK.B)

At Q3's end, a total of 99 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards BRK-B over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

BRKB_nov2019

The largest stake in Berkshire Hathaway Inc. (NYSE:BRK.B) was held by Bill & Melinda Gates Foundation Trust, which reported holding $11422.9 million worth of stock at the end of September. It was followed by Eagle Capital Management with a $2127.2 million position. Other investors bullish on the company included Gardner Russo & Gardner, Pershing Square, and Arlington Value Capital. In terms of the portfolio weights assigned to each position Punch Card Capital allocated the biggest weight to Berkshire Hathaway Inc. (NYSE:BRK.B), around 57.53% of its portfolio. Bill & Melinda Gates Foundation Trust is also relatively very bullish on the stock, designating 53.82 percent of its 13F equity portfolio to BRK-B.

As aggregate interest increased, specific money managers were leading the bulls' herd. Wexford Capital, managed by Charles Davidson and Joseph Jacobs, established the most outsized position in Berkshire Hathaway Inc. (NYSE:BRK.B). Wexford Capital had $29.5 million invested in the company at the end of the quarter. Daniel Gold's QVT Financial also made a $10 million investment in the stock during the quarter. The other funds with brand new BRK-B positions are Perella Weinberg Partners, Peter Seuss's Prana Capital Management, and Donald Sussman's Paloma Partners.

Let's now review hedge fund activity in other stocks similar to Berkshire Hathaway Inc. (NYSE:BRK.B). These stocks are Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), Visa Inc (NYSE:V), and JPMorgan Chase & Co. (NYSE:JPM). All of these stocks' market caps resemble BRK-B's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FB,179,20837470,-3 BABA,149,19197070,22 V,132,15686359,15 JPM,84,11167465,-6 Average,136,16722091,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 136 hedge funds with bullish positions and the average amount invested in these stocks was $16722 million. That figure was $22272 million in BRK-B's case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand JPMorgan Chase & Co. (NYSE:JPM) is the least popular one with only 84 bullish hedge fund positions. Berkshire Hathaway Inc. (NYSE:BRK.B) is not the least popular stock in this group but hedge fund interest is still below average. That means other hedge fund managers don't agree with the 99 hedge funds with positions in BRK-B. They think Facebook, Alibaba, and Visa are better investments than JP Morgan and Berkshire Hathaway.

Nevertheless, except JP Morgan, all of these stocks are among hedge funds' top 20 picks . Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% during the first 11 months of 2019 and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BRK-B wasn't nearly as successful as the remaining 19 stocks; BRK-B investors were disappointed as the stock returned 7.9% during same period and underperformed the market by nearly 20 percentage points. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4. We just don't think neither Berkshire Hathaway nor hedge funds investing in Berkshire Hathaway are worth imitating. If you wonder why we don't like Warren Buffett's stock picks, download our free report (you need to create a free account on our site) that analyzed the performance of Warren Buffett's historical stock picks quantitatively. Our results will shock you.

Disclosure: None. This article was originally published at Insider Monkey.

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