High conviction holdings of top-performing hedge funds

February 17, 2016 10:00 AM

Investors will get their first peek of the year into hedge-fund managers’ holdings in mid-February as they file updated 13F disclosures. These filings, representing holdings as of the end of 2015, will provide insights  into how these managers positioned themselves for 2016. 

We thought it would be a good time to take a look back at the hedge funds that provided the highest returns for investors replicating their holdings over the past five years. We created equal-weighted portfolios of the top 20 holdings of the most popular 300 managers that WhaleWisdom tracks, rebalancing their holdings at the 13F filing deadline each quarter, to identify the leading funds over the past one-, three-, and five-year periods (see “Top funds”). 

During the last year, the leading funds focused on a wide variety of industries, but a look back over a three- or five-year time frame shows that the nine of the top 10 three-year leaders and eight of the top 10 five-year leading funds specialized in healthcare. This should not be too surprising, because the healthcare sector has been the top-performing sector of the S&P 500 over the past five years. Its cumulative 151% return is substantially higher than the 126% return of the next closest sector, consumer cyclicals. 

Baker Brothers has been the most consistent top-performer over the past five years. Success is not new to Julian and Felix Baker, who started in 2000 with a focus on trading in public life-sciences companies. SEC disclosures show that the firm’s holdings have grown explosively, from about $225 million in 2002 to more than $10 billion in 2015, because of its continued success. The brothers manage their investments actively, generally taking board positions and large ownership stakes. Their largest holding — a $2 billion investment in INCYTE Corporation (INCY) — represents close to 20% of their portfolio and a 10% stake in INCYTE. Investors expecting continued growth opportunities in the healthcare sector would be wise to follow their moves closely.

In contrast to success of the healthcare sector, the worst performing sector clearly has been energy, especially in the past 18 months. It has produced a cumulative return of -2% since the end of 2010. Energy-focused hedge funds have underperformed relative to healthcare-focused firms, but depressed energy shares also may represent growth opportunities for funds that invest in that sector. “Big energy” represents the five largest hedge funds with at least 75% of their holdings in energy.

About the Author

Brent Plunkett is the co-owner of WhaleWisdom.com and CEO of Charter Wealth Management.  WhaleWisdom helps investors research and replicate the portfolios of top hedge funds through their publicly available SEC disclosures providing access and tools to invest like a Wall Street money manager at a Main Street price.