Hedge fund managers rarely come up with “original” investment ideas. They have a limited number of employees and there are so many stocks to cover. Most of them invest in only a tiny fraction of all stocks in the stock market. It’s not feasible for them to research each and every stock trading in the markets.
One solution is to start with a much smaller universe. They can reduce the number of stocks which need an in-depth analysis by four methods:
1. Use predetermined quantitative filters.
2. Use investment ideas pitched by independent research firms
3. Use stocks invested by other hedge funds
4. Follow the news, financial publications, etc. and try to create investment themes.
Insider Monkey, your source for free insider trading data, generally doesn’t want to pay anybody for investment ideas, so we stay away from independent research firms. However, we follow insider transactions and pick potentially profitable stocks bought by insiders. That’s a good starting point for an indepth analysis. We also follow the news and use our judgment whether a particular stock, sector or theme is ripe for higher returns. Our third approach is to follow other hedge fund managers and examine their stock picks. Most hedge fund managers also do this to a certain degree. They get tips from their hedge fund buddies and pay back with their own tips. We don’t think there is anything wrong with this. The only problem is sometimes some trades might get really crowded.
Insider Monkey prepared the list of top 10 stocks enormously owned by hedge funds. We require at least 70 hedge funds owning these stocks and rank them by the per cent of the company owned by hedge funds (source data). You might interpret this list as a “hedge fund favourite stock list” or a “hedge fund risky stock list”. Clearly hedge funds think highly of these stocks and they accumulated huge amounts of shares. However, it is also possible to see that these stocks would plunge much more than other stocks if negative news hit the company and hedge funds try to exit their positions all at once. Here are these 10 stocks enormously owned by hedge funds:
1. Liberty Media Starz Group (LSTZA): 29% of Liberty Media was owned by 80 different hedge funds at the end of September. It would take hedge funds 40 days’ average volume to liquidate their positions assuming it is possible in the event of adverse news. There were several LSTZA insiders selling their shares in December.
2. Aon Corp (AON): 24% of Aon Corp is owned by 88 hedge funds. It would take them 32 days’ average volume to exit their positions. Lester B. Knight, an AON director, purchased 50,000 shares at the end of November as well, showing insider support for this stock. The stock went up by more than 10% since then. Glenview’s Larry Robbins also has a large AON position.
3. Genzyme (GENZ): 23% of Genzyme is owned by 97 hedge funds. It wouldl take 15 days’ average volume to exit.
4. CF Industries Holdings Inc (CF): 20% of CF Industries Holdings is owned by 72 hedge funds. It would take only 6 days’ average volume to liquidate these positions.
6. Potash Corp (POT): 16% of Potash Corp (POT) is owned by 114 different hedge funds. It would take only 7 days’ average volume to liquidate these positions. Dan Loeb’s Third Point and Mohnish Pabrai also own large quantities of Potash.
8. Xerox Corp (XRX): 9% of Xerox is owned by 73 hedge funds. It would take them 8 days to liquidate their positions. Lynn Blodgett, Executive Vice President, exercised her stock options on Monday and netted more than $2 million. Chase Coleman and Larry Robbins are among the hedge fund managers who own XRX.
9. Alcon Inc (ACL): 8% of Alcon Inc is owned by hedge funds but it would take them 25 days’ average volume to exit their positions. Third Point owns Alcon shares.