As I was watching an episode of the Joseph Carlson Show on Youtube it occurred to me that big hedge funds are always making headlines for their incredible stock picks or their overall portfolio performance. So I thought I should take a closer look at their public records or 13F filings.
After narrowing down my search (i.e. giving up my search for each hedge fund) I was able to uncover Hedgefollow.com, a website that aggregates the top stocks by total amount bought and total amount sold from all the top hedge funds, for the most recent quarter.
By simply looking at the buy’s list any investor could return a veritable treasure trove of the best stocks to invest in. Essentially narrowing down the thousands of possible stocks to those with the most potential. At least according to the smart money. Additionally, to see how I may be utilizing Hedgefollow for my options trading, take a look at my recent post, “The Options ETF”. In it I discuss why my old way of trading just didn’t work for me and what I’ll be doing going forward.
In any case, with today’s post I want to take a closer look at Hedgefollow.com to highlight a few steps I’d take to get the most out of the data they’ve made available.
Create a Buying Watchlist
First, let’s start with a list. You know, something we can keep a closer eye on. From here I can begin to research and determine which assets I may truly want to own. I’ll keep the list in this post limited to the top 10 but when I create the list on Thinkorswim I’ll likely add many more and cut away as I decide on my favorites.
From Hedgefollow.com, the top 10 assets that hedge funds were buying in the 4th quarter of 2023:
- Microsoft
- SPY
- Amazon
- Apple
- QQQ
- Broadcom
- Ishares Core S&P 500
- Nvidia
- Uber
- Meta
Not exactly shocking, I know. But for those that may be struggling to decide which assets make sense this list could at least offer a decent starting point. Further, I think most will agree there are far worse places to park our investment dollars.
Create a Selling Watchlist
Remember, I said Hedgefollow.com has a list for the most sold and the most bought assets. Therefore, I think it prudent to go ahead and make a second list of those stocks that were ultimately cut the most.
From Hedgefollow.com, the top 10 assets that hedge funds were selling in the 4th quarter of 2023:
- Microsoft
- Nvidia
- SPY
- Apple
- Meta
- Amazon
- Visa
- Uber
- Adobe
Well, that’s interesting. The most bought are also the most sold. Not exactly helpful, I know, but keep in mind these are the largest cap stocks on the planet. It would make sense that they see the largest volume on both sides of a trade. Fortunately, Hedgefellow includes the amount being bought or sold. Thus, some simple math will highlight if the hedge funds were net buyers or net sellers for the period.
Unfortunately, we can’t see before hand what the hedge funds are buying. I guess not without following specific funds and paying close attention to any news they may release with regards to their investments.
That said though, hedge funds aren’t generally short term traders. Once they decide on an investment they’ll typically hold it for a while to give it ample opportunity to return the desired result. Which basically means, we’ll be late to the party but may show up just as the cakes being cut.
Create a Net Buying List
Yes, you read that right. I’m thinking a third list would make good sense. Only this time we’re going to take the lists we’ve created and subtract the total dollar amount being sold from the amount being bought. This will be the final list and this list would likely become the primary watchlist to determine where I may choose to invest my own money. For the sake of time, I’ll just show my process with Microsoft. However, in my own trading I’d go through each company from the lists above to determine whether there we’re net inflows or net outflows.
Microsoft buys – $25.53 Billion
Microsoft sells – $19.52 Billion
Net – $6.01 Billion
From this we can see that Microsoft saw net inflows from the hedge funds of $6.01 Billion. If you’re incline to believe these hedge funds know what their doing then buying may make sense. However, I’d suggest following closely to Hedgefollow.com to know as soon as the most recent quarters reports are made available.
Next Steps
With our final list created, now I would start the potentially arduous process of culling the list down to my absolute favorites. This process will be unique to each individual investor but generally speaking the following steps would be at least a decent process.
- Fundamental Analysis
- Valuation Determination
- Technical Analysis
- Entry/Capital Determination
- Strategy
- Exit plan
Likely, the fundamentals of any company a hedge fund is investing in will be solid but checking to be sure is a good start. After that, I would determine what I believe to be a fair valuation using several different techniques (Google, “How to value a stock” for more information). If I decided I wanted to own the asset, I’d then want to consider the chart’s structure and where price is currently. Do I see technical weakness, strength, or neutrality? From there I will decide how much I want to commit and at which price level. Alternatively, I may opt to dollar cost average into the investment. Either way, I’d decide that beforehand.
The final two steps are of the utmost importance. First, I need to understand why I should invest. Is it a dividend paying stock that I’ll want to hold forever, a short term play, or maybe an options play? Whichever is decided will ultimately impact my exit plan so I’ll want to know before I start. With the strategy determined, I need to be clear with myself how, if ever, I’m going to get out. With some investments there is no exit plan needed but for options, or short term holds, it needs to be decided before the trade begins. Otherwise, you’ll definitely meet that optimistic side of yourself at some point that believes, “If I just hold on, it’ll come back.”
God bless,
Jeff
