You don't have to invest in the top hedge funds to get the benefit of their stock-picking savvy.
By law, hedge funds must disclose their activity quarterly in 13-F filings. That gives retail investors a chance to pore over the holdings of the best hedge funds for ideas.
In fact, investors who cherry-pick the best investment ideas from top hedge funds will almost surely fare better than the well-heeled institutional investors that pour their money into the funds themselves.
According to Hedge Fund Research, hedge funds as a group have not beaten the Standard & Poor's 500 index for the past six years.
Last year, for instance, the Vanguard Balanced Index Fund (MUTF: VBINX) had a return of 9.8% compared to the average hedge fund return of just 3%.
But it's not so much that hedge fund managers have all lost their mojo...
The Story Behind the Hedge Fund Doldrums
Hedge fund performance has slumped for several reasons. One reason is that fund managers get paid no matter what, so many of them have grown more conservative.
But the main reason for the dry spell is that hedge funds have become a victim of their own success. Most fund managers have so much money coming in from investors that they literally don't know what to do with it.
Hedge Fund Research says the amount of money in hedge funds has rocketed from $1.6 trillion at the end of 2009 to $2.845 trillion today.
You see, first-rate investing ideas are not that easy to come by. Most managers only have about five or six top-notch ideas at any given time.
But as assets under management increase, it becomes impossible to cram all the new money into the same five investments. So the fund manager comes up with five, ten, twenty, or more good-but-not-great ideas. And that dilutes returns.
All this is bad news for the insurance companies and pension funds that have sunk billions into hedge funds. The subpar returns and high fees mean they're making very little money.
But here retail investors have the rare advantage. They can focus on just the best ideas of the top hedge funds.
According to Insider Monkey, a website that tracks hedge fund performance, these are the top 10 hedge funds from the most recent quarter and the top five holdings for each of them:
Top Hedge Funds and Their Biggest Holdings
In most cases, a hedge fund manager will put as much money as possible into his best ideas - the top holdings of the fund. Here are the standings as of the end of 2014's fourth quarter:
Top Hedge Funds, No. 1: Broadfin Capital
Manager: Kevin Kotler
Quarterly return: 60.3%
Portfolio value: $1.15 billion
Investing focus: Healthcare
Top 5 Holdings:
- Horizon Pharma Plc. (Nasdaq: HZNP) (9.99% of portfolio)
- Flamel Technologies (Nasdaq: FLML) (7.67%)
- Progenic Pharmaceuticals (Nasdaq: PGNX) (5.88%)
- Emergent Biosolutions Inc. (NYSE: EBS) (4.89%)
- Aegerion Pharmaceuticals Inc. (Nasdaq: AEGR) (4.64%)
Top Hedge Funds, No. 2: Dafna Capital Management
Manager: Nathan Fischel
Quarterly return: 51.4%
Portfolio value: $126.4 million
Investing focus: Healthcare
Top 5 Holdings:
- Pharmacyclics Inc. (Nasdaq: PCYC) (10.72% of portfolio)
- Atricure Inc. (Nasdaq: ATRC) (10.44%)
- Auspex Pharmaceuticals Inc. (Nasdaq: ASPX) (5.64%)
- NxStage Medical Inc. (Nasdaq: NXTM) (5.44%)
- Discovery Laboratories Inc. (Nasdaq: DSCO) (5.22)
Top Hedge Funds, No. 3: Sabby Capital
Manager: Hal Mintz
Quarterly return: 43.9%
Portfolio value: $3.17 billion
Investing focus: Healthcare
Top 5 Holdings:
- Tesaro Inc. (Nasdaq: TSRO) (23.61% of portfolio)
- Depomed Inc. (Nasdaq: DEPO) (10.22%)
- PUT: SPDR S&P 500 ETF Trust (NYSE Arca: SPY) (4.92%)
- CALL: Biogen Inc. (Nasdaq: BIIB) (4.91%)
- PUT: Gilead Sciences Inc. (Nasdaq: GILD) (3.62%)
Top Hedge Funds, No. 4: Consonance Capital Management
Manager: Mitchell Blutt
Quarterly return: 33.2%
Portfolio value: $776.33 million
Investing focus: Healthcare
Top 5 Holdings:
- Enanta Pharmaceuticals Inc. (Nasdaq: ENTA) (11.1% of portfolio)
- United Therapeutics Corp. (Nasdaq: UTHR) (11.01%)
- Cardiovascular Systems Inc. (Nasdaq: CSII) (8.27%)
- Ani Pharmaceuticals Inc. (Nasdaq: ANIP) (7.91%)
- Akorn Inc. (Nasdaq: AKRX) (7.85%)
Top Hedge Funds, No. 5: Baker Bros. Advisors
Managers: Julian Baker and Felix Baker
Quarterly return: 29.3%
Portfolio value: $9.8 billion
Investing focus: Healthcare
Top 5 Holdings:
- Pharmacyclics Inc. (Nasdaq: PCYC) (11.39% of portfolio)
- Incyte Corp. (Nasdaq: INCY) (11.07%)
- Synageva Biopharma Corp. (Nasdaq: GEVA) (10.09%)
- Seattle Genetics Inc. (Nasdaq: SGEN) (9.13%)
- Avanir Pharmaceuticals Inc. (Nasdaq: AVNR) (6.66%) (bought by Otsuka Holdings Jan. 13)
Top Hedge Funds, No. 6: Palo Alto Investors
Manager: William Leland Edwards
Quarterly return: 27.7%
Portfolio value: $1.7 billion
Investing focus: Healthcare
Top 5 Holdings:
- United Therapeutics Corp. (Nasdaq: UTHR) (10.66% of portfolio)
- Auxilium Pharmaceuticals (Nasdaq: AUXL) (9.92%) (Bought by Endo Corp. Jan. 29)
- Cubist Pharmaceuticals Inc. (Nasdaq: CBST) (7.7%) (Bought by Merck Jan. 21)
- Clovis Oncology Inc. (Nasdaq: CLVS) (6.91%)
- BioMarin Pharmaceutical Inc. (Nasdaq: BMRN) (6.91%)
Top Hedge Funds, No. 7: Deerfield Management
Manager: James E. Flynn
Quarterly return: 26.8%
Portfolio value: $2.78 billion
Investing focus: Healthcare
Top 5 Holdings:
- Auxilium Pharmaceuticals (Nasdaq: AUXL) (7.74% of portfolio) (Bought by Endo Corp. Jan. 29)
- Auspex Pharmaceuticals Inc. (Nasdaq: ASPX) (5.56%)
- Horizon Pharma (Nasdaq: HZNP) (5.41%)
- Allergan Inc. (Nasdaq: AGN) (4.63%) (Bought by Actavis March 17)
- Flamel Technologies (Nasdaq: FLML) (3.23%)
Top Hedge Funds, No. 8: Grow Partners
Manager: Carl Wiese
Quarterly return: 26.4%
Portfolio value: $109.2 million
Investing focus: Tech, Industrials
Top 5 Holdings:
- Incontact Inc. (Nasdaq: SAAS) (8.04% of portfolio)
- Planet Payment Inc. (Nasdaq: PLPM) (7.49%)
- Cui Global Inc. (Nasdaq: CUI) (7.05%)
- Icad Inc. (Nasdaq: ICAD) (6.76%)
- Ligand Pharmaceuticals Inc. (Nasdaq: LGND) (6.69%)
Top Hedge Funds, No. 9: Perceptive Advisors
Manager: Joseph Edelman
Quarterly return: 25.4%
Portfolio value: $1.2 billion
Investing focus: Healthcare
Top 5 Holdings:
- Amicus Therapeutics Inc. (Nasdaq: FOLD) (10.07% of portfolio)
- Neurocrine Biosciences Inc. (Nasdaq: NBIX) (6.67%)
- AcelRx Pharmaceuticals Inc. (Nasdaq: ACRX) (3.71%)
- Sarepta Therapeutics Inc. (Nasdaq: SRPT) (3.41%)
- Relypsa Inc. (Nasdaq: RLYP) (3.2%)
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Top Hedge Funds, No. 10: Kylin Management
Manager: Ted Kang
Quarterly return: 25.2%
Portfolio value: $797.5 million
Investing focus: Technology, Finance
Top 5 Holdings:
- Vipshop Holdings Ltd. (NYSE: VIPS) (39.8% of portfolio)
- Interactive Brokers Group Inc. (Nasdaq: IBKR) (17.54%)
- Qihoo 360 Technology Co Ltd. (NYSE: QIHU) (10.55%)
- com, Inc. (Nassdaq: JD) (10.18%)
- E-House China Holdings Ltd (NYSE: EJ) (7.47%)
Following the "Smart Money": Because retail investors don't have access to the resources that the pros do, that means they have to use some backdoor methods to find the best investments. Money Morning Executive Editor Bill Patalon literally wrote a book on these strategies. Here he shares some of his best secrets...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.