These 5 Investors Took Home More Money Than Goldman Sachs Last Year

This week, Institutional Investor's Alpha published its annual "Rich List" of the top-earning hedge fund managers, and the numbers, as per usual, boggle the mind. It seems inconceivable that five individuals could earn more in a year than Goldman Sachs, the most influential and profitable investment bank, and yet that is what happened last year (see table below). For the investor whose annual income is not in ten figures, is there any advantage to be gained in following these luminaries and their investments?

The answer is yes. Below, you'll learn some tips on how to read a hedge fund's quarterly report of its securities holdings that they are required to file with the Securities and Exchange Commission (SEC) on form 13F -- which often yield potentially promising investing ideas.

Data source: Institutional Investor's Alpha, Goldman Sachs

Is there anything to be gleaned from their investments?

With regard to Citadel, Renaissance, Bridgewater, and Millennium, the answer is no, but with regard to Appaloosa is "quite possibly" -- the following table will start to give you an inkling why:

Data source: Company filings at sec.gov, WhaleWisdom

"Sure", you say, "Citadel, Millennium, and Bridgewater have a lot of holdings, but they clearly have some high conviction stock picks -- look at the size of their top positions!"

(We can exclude Renaissance at the outset, as they are a purely systematic, quantitative trader -- their holdings have zero informational value for an ordinary investor.)

Until you look at what those top positions are:

Source: WhaleWisdom

Smart and successful they may be, but they're not bottom-up, high-conviction investors -- which is the only sort of investor I'm interested in following to find investment ideas.

David Tepper and his firm, Appaloosa Management, however, are a different beast. The Goldman Sachs alumnus earned his seat in the pantheon with a huge bet on bank shares and securities in March 2009, reasoning that the U.S. Treasury would not allow the financial system to collapse. As the market capitulated -- the S&P 500 bottomed on March 9 -- Tepper scooped up shares of Bank of America and Citigroup. His average cost per share on the Citigroup position: $0.79.

That insight -- and the conviction to act on it -- paid off spectacularly. Tepper's flagship fund was up more than 130% in 2009, earning him a $4.0 billion payday.

Perhaps you're starting to get the sense that Mr. Tepper is a contrarian investor who makes bets that he can explain in plain English. That's perfectly consistent with the most obvious change in his holdings during the fourth quarter; namely, a meaningful allocation to the beaten-down energy sector and, in particular, to pipeline companies. The following table shows five of Appaloosa's new positions:

*Closing price on 05/12. Data source: WhaleWisdom, Bloomberg, author's calculations.

Is this information fully priced into the stocks? Maybe, maybe not, but for stock pickers, I think it could be well worth taking a closer look at these companies and their valuations.

Doing your own due diligence is imperative -- keep in mind that we don't know what price Mr. Tepper paid for those stocks, nor what changes he may have made to the portfolio in the first quarter. The answer to the second question will soon be known, however -- the SEC requires investment managers to report their holdings no later than Monday.