What do the world’s top hedge funds look like? The obscure corner of Wall Street has long been insular, inaccessible and almost entirely disconnected from the individual investor. No matter, the field has still been romanticized and played up in Hollywood and the media for years on end.
In truth, retail investors should generally be grateful they don’t have access to hedge funds, which limit access to “high net worth” individuals, pension plans, insurance companies, universities and the like. The reason to be grateful? Hedge funds charge enormous fees — typically 2% of assets under management and 20% of gains — that simply aren’t justified by their returns.
Hedge funds, which typically aim to only go up (that is, make money in bull markets but not lose money in bear markets) tend to underperform the S&P 500 as a group. Granted, you’d expect to see more outperformance in bear markets, but down markets are the exception, not the rule.
Regardless, not all hedge funds are lousy. In fact, some of the best hedge funds are time-tested, market-walloping machines. Here’s a look at five of the top hedge funds in the world and the strategies they utilize:
— Renaissance Technologies (Medallion fund)
— Bridgewater Associates
— Pershing Square
— Jana Partners
— Tiger Global Management
1. Renaissance Technologies (Medallion fund)
In the ultra-competitive, dog-eat-dog world of Wall Street, it’s awfully hard to be the best. It’s even tougher to stay at the top. For decades on end now, one fund has quietly crushed the market by margins so large they’d make Warren Buffett blush.
“With 66% average annual returns since 1988 — 39% after fees — Renaissance’s Medallion fund is in a league of its own,” says Gregory Zuckerman, a special writer for The Wall Street Journal and the author of “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.”
“Their advantages include better talent, a unique management approach and a strategy of betting on the relationships among investments, rather than wagering on which will rise and fall,” Zuckerman says.
Those numbers, good through the end of 2019, only improved throughout 2020, when the fund reportedly jumped 76% before fees — a legendary year by most standards, but for Medallion, just the third-best year in its history.
The fund, which is closed to new investors and only allows Renaissance employees to put their money in, uses a bit of a “black box” strategy, staying very secretive about what exactly the secret sauce consists of. What is known, however, is that the Medallion fund employs a “quant” strategy, trading largely on data and mathematical relationships rather than fundamentals and often owning positions for extremely short periods.
Renaissance’s founder Jim Simons is a certified mathematical genius, beginning his career as a mathematician and achieving breakthrough discoveries that led to the development of string theory. He later worked as a codebreaker for the National Security Agency before starting his own hedge fund.
Perhaps it’s not surprising one of the best hedge funds in the world is run by a brilliant mind.
2. Bridgewater Associates
Bridgewater Associates is the biggest hedge fund in the world, managing about $150 billion in investor money. Founded by Ray Dalio out of his apartment in 1975, the company shares some similarities with Renaissance — most importantly, the principle of accumulating massive troves of data and allowing an algorithm to make investment decisions.
Although the proverbial investing machine has proved its mettle over time, it’s still not infallible. The firm reportedly lost $12.1 billion for investors in 2020, just one year after its flagship fund, Pure Alpha II, lost 0.5%.
Despite the enormous loss last year, Dalio’s Bridgewater remains one of the strongest hedge funds of all time, with profits of more than $46 billion over its lifetime.
Another thing setting Bridgewater apart is its culture, which Dalio has carefully engineered through the decades. The firm prizes “radical transparency,” encouraging blunt feedback between co-workers to foster an idea of meritocracy. While this entails a higher turnover rate, it also seems to have worked.
3. Pershing Square
Getting away from data-obsessed, extremely secretive firms like Renaissance Tech and Bridgewater Associates, Pershing Square Capital Management is another one of the top hedge funds in the world. Run by Bill Ackman, a savvy Wall Street billionaire, the fund’s top holding is currently home improvement retailer Lowe’s (ticker: LOW). It’s a highly concentrated fund, with only seven total stocks, five of which hail from the consumer discretionary sector.
Ackman is considered an activist investor, spotting companies with the potential to create a lot of value, then acquiring a large stake and agitating as a shareholder for changes that will drive up the stock price. Alternatively, Ackman sometimes sells stock short in a company that’s struggling or that his research indicates is worth far less than it’s trading for, then makes his concerns and research public to persuade the market.
Launched in 2004, Ackman became famous for a reason, beating the S&P 500 for seven straight years, and making various successful bets including Wendy’s ( WEN), Target ( TGT), General Growth Properties and Canadian Pacific Railway ( CP). A horrible losing stretch between 2015 and 2018, characterized by a record $4 billion loss in Valeant Pharmaceuticals — since renamed Bausch Health Companies ( BHC) — seems to have recently been broken.
In fact, that might be an understatement given Pershing’s 70.2% return in 2020, one of its best years ever.
4. Jana Partners
Another firm using a strategy similar to Ackman’s is Jana Partners, run by Barry Rosenstein, considered one of the top hedge fund managers in the game. Founded in 2001, it claims to ignore the crowd and typically focuses on value stocks in its “event-driven,” or activist, endeavors.
Like many of its peers, Jana Partners is essentially a fund family of sorts, offering multiple different funds with different focuses. The one it has become famous for, agitating for change at companies like Whole Foods and Apple ( AAPL), to name a couple, is called Jana Strategic Investment. Over its lifetime the fund returned 17.5% annually through the end of 2019, the most recent year for which there’s reporting on its performance.
Recently, Jana has taken a big position in life sciences company Laboratory Corp. of America Holding ( LH), using that influence to nominate members to the board of directors. After selling a long-held position in Callaway Golf ( ELY), Labcorp is now the fourth-largest holding in its portfolio. ConAgra Brands ( CAG) is its largest holding.
5. Tiger Global Management
Last but not least, Tiger Global Management has been one of the world’s top hedge funds for several years now. Founder Chase Coleman is a disciple of hedge fund legend Julian Robertson, whose Tiger Management was legendary on Wall Street, beginning with $8 million in 1980 and reaching $22 billion in assets by the late 1990s.
As far as reported long positions go, Tiger Global was the single best performer among large hedge funds between 2016 and mid-2019, returning 22.4% annually.
Tiger’s hot streak continued in 2020 as well, with Tiger Global finishing the pandemic-ravaged year as the single most lucrative hedge fund among a list of 20 top funds compiled by LCH Investments. Tiger Global returned $10.4 billion for investors last year alone.
One advantage of being a well-capitalized hedge fund is the ability to finance hot companies that aren’t yet public, something mutual funds can only do to a very limited degree. Tiger Global has enjoyed some great private equity investments over the years, funding companies like Facebook ( FB), Alibaba Group Holding ( BABA), Uber ( UBER), Airbnb, Stripe, LinkedIn, Juul, Flipkart and Square ( SQ) when they were privately held.
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