Businessman Attracts Money With Giant Magnet

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.

 

Firm

2015 Earnings

Kenneth Griffin

Citadel

$1.7 billion

James Simons

Renaissance Technologies

$1.7 billion

Raymond Dalio

Bridgewater Associates

$1.4 billion

David Tepper

Appaloosa Management

$1.4 billion

Israel "Izzy" Englander

Millennium Management

$1.15 billion

 

TOTAL

$7.4 billion

Goldman Sachs & Co.

 

$6.1 billion

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:

 

Number of holdings

Largest holding as a % of reported holdings

Citadel

11,698

5.2%

Renaissance Technologies

3,253

1.6%

Millennium Management

3,135

4.02%

Bridgewater Associates

263

31.3%

Appaloosa Management

52

12.2%

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:

 

Top holding

Top non-index holding

Citadel

SPDR S&P 500 ETF (Puts)

Amazon (Puts)

1%

Millennium Management

SPDR S&P 500 ETF

NextEra Energy Inc

0.8%

Bridgewater Associates

Vanguard FTSE Emerging Markets ETF

Apple

0.5%

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:

 

% of reported holdings' value

Current price discount to the average closing price in the 4th quarter*

Kinder Morgan Inc (NYSE:KMI)

2.81%

(29%)

Energy Transfer Partners LP (NYSE:ETP)

3.46%

(10%)

Williams Partners (NYSE:WPZ)

1.32%

(3%)

Southwestern Energy Company (NYSE:SWN)

0.62%

+21%  [Now trades at a premium]

Alerian MLP ETF (NYSEMKT:AMLP)

1.42%

(4%)

TOTAL

9.63%

 

*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.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has the following options: short June 2016 $12 puts on Kinder Morgan. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.