Some of the best hedge fund stock pickers are those many investors may never have heard of before, how is that possible?
Hedge fund stock pickers: Separating alpha from beta
Separating hedge fund managers from their “alpha,” or individual skill at selecting appropriate investments, from “beta,” or the general performance of a market or stock sector, was the goal of a new study from Alpha Attribution.
“Lots of the big guys have been coasting on the relentless nature of the current bull market – not that there’s anything wrong with that,” Josh Brown wrote about the study. “The bill collectors don’t ask you whether or not alpha or beta were involved when you send in the check.” This may be true, but paying high hedge fund fees for performance that can be generated through low fee beta investment products might not be wise either.
The study’s authors explain the objective of their work:
Let’s say you are a hedge fund manager and you held GOOG stock for a quarter. If GOOG goes up 10%, that is great, but if the technology sector goes up 7%, much of that 10% return may have been coming from the sector. You got the sector right, which is worth 7%, but your stock selection ability is only worth 3% (10%-7%). We define stock selection skill is one’s ability to pick a security that outperforms its sector (with some adjustments for beta, etc).
RA Capital Management tops hedge fund stock pickers list
Considering the “magnitude and consistency” of hedge fund managers over the last three years, the list of top hedge fund picks is one that you might not see in the headlines that often. In fact, some of the funds don’t even have write-ups on hedge fund tracking services. Three of the more interesting funds include RA Capital Management, Senator Investment Group and Egerton Capital Management.
The top manager on the list is RA Capital Management, with a 43.8 percent “Security Selection Skill” ranking, according to the study. The volatile bio-tech strategy is run by Peter Kolchinsky, who earned a PH.D in virology in 2001. Kolchinsky evaluates stocks based on their fundamental promise with drugs and technologies – a risky area of investing considered by some hedge fund investors to be akin to investing on a roulette wheel. This is because picking winners based on who has the next big cure approved by the FDA can generate massive wins – but those wins come few and far between. The fund’s top three investments in portfolio percentage are currently found in Achillion Pharmaceuticals, Acadia Pharmaceuticals and Dyax Corp.
Hedge fund stock pickers: Senator Investment Group and Egerton Capital
Senator Investment Group, operated by Douglas Silverman and Alexander Klabin, has an 11.1 percent Security Selection Skill level. The team worked at York Capital Management before establishing Senator in 2008 and currently operates a diversified portfolio with heavy concentrations in services, healthcare and basic materials. The fund’s top three stock picks in terms of assets under management include Time Warner Cable, Actavis and the Intercontinental Exchange Group.
Egerton Capital, founded by John Armitage and William Bollinger, with $4.5 billion under management, are deciples of Julian Robertson’s Tiger Management and take long / short positions in European equities, having returned nearly 15% annually since 1994. The fund’s current top picks include Comcast Corp, Gilead Sciences and Wells Fargo. They favor the services sector, followed by healthcare and financials.