The WhaleIndex, a proprietary long-only index composed of leading hedge fund managers’ highest-conviction stocks, provides a starting point for identifying potential value in a dismal market sector. The index includes the 100 stocks most frequently disclosed on the quarterly 13F regulatory filings of consistently successful investment managers. These managers’ success is measured by their WhaleScores, a proprietary metric that reflects each fund’s overall portfolio performance, risk-adjusted returns and replicability.
A fund manager whose one-year average WhaleScore is higher than the one-year average WhaleScore of the S&P 500 for seven of the last eight quarters qualifies for inclusion in the WhaleIndex (see “Beating the index”). Based on the holdings disclosed on its SEC filings, WhaleWisdom identifies the 100 stocks most commonly held among the respective managers’ top 20 holdings. The index is equal-weighted and rebalanced on a quarterly basis 46 days after the end of each quarter.
Among other things, the index offers an interesting prism for viewing the energy sector, which continued to struggle in the third quarter as energy prices dipped below $40 a barrel. While stocks in the sector have undergone a large correction during the last year, most hedge funds are apparently still shunning them. Only two — Halliburton Co. (HAL) and Consol Energy Inc. (CNX) — remain in the WhaleIndex, compared to the 21 that would have been included in the second quarter of 2008.
Still, several successful managers recently have made notable moves to position their funds for a rebound in the sector. Third Point, a New York hedge fund managed by Daniel Loeb, opened new positions in Devon Energy Corp. (DVN) and Williams Companies Inc. (WMB) in the second quarter, with 3.8 million and 1.5 million shares, respectively. Baupost Group increased its position in Cheniere Energy (LNG), already its largest in a U.S. company, with the purchase of an additional 1.6 million shares in the second quarter, and has also upped its stake in Pioneer Natural Resources (PXD), its third-largest. Not to be outdone, Carl Icahn also reported a new 8.2% stake in Cheniere in a 13D disclosure on Aug. 6. These moves suggest that the energy sector, while widely considered risky, also may include some companies with the potential to rebound sharply (see “Best & worst in energy”). Savvy individual investors who pay attention to moves like these could be well positioned to catch the same upside.