Best Hedge Funds in 2012

By Meena Krishnamsetty, InsiderMonkey.com

We are do-it-yourself investors. Our favorite hedge funds are the ones that have outstanding long stock picks because we like to imitate these hedge fund managers and don’t want to pay the customary 2-and-20. Most hedge fund managers have more skill in picking long positions than shorting stocks, so we don’t really miss out much by not handing over our hard-earned dollars to super-rich hedge fund managers.

We track 375 hedge funds and prominent investors. Based on their long stock picks in their 13F disclosures we calculated the value-weighted average return of each hedge fund since the beginning of the year (larger positions will have a larger impact on the final result). We limited our universe to 1000 stocks and required that each hedge fund had at least 5 picks.

Here are the best hedge funds in 2012:

1. Eddie Lampert: Eddie Lampert’s 8 stock picks returned an average of 44.1%. This is amazing. Lampert’s most successful stock pick was Sears SHLD. He not only bought these shares for his fund but he also bought them for his own account as an insider of the company. Lampert paid less than $30 per share for nearly 5 million shares of SHLD in early January. Is this illegal insider trading? We don’t think it is. This is a great example of profitable insider trading. Lampert knows his company better than all the outsiders who were writing Sears off in January. The stock closed above $75 on Friday. Lampert personally made more than 150% from his $150 million insider purchases.

Lampert’s other long positions in his portfolio were also very profitable. Seagate STX returned 67%, Genworth Financial gained 37%, and Gap Inc GPS returned 32%. Seven out of eight Lampert stocks managed to beat the market.

2. Bruce Berkowitz: Bruce Berkowitz is a contrarian investor with a lot of conviction. His bets paid off this year. Berkowitz’s 16 stock picks had a value-weighted average return of 36%. He has more than $500 million invested in Sears too. He is also the most bullish fund manager about Bank of America BAC which returned 46% this year as of March 2^nd.

3. Michael Katz Glenrock Global Partners: Michael Katz is a relatively unknown hedge fund manager. Katz’s Glenrock Global Partners returned 9.6% since 2000 and managed to beat its benchmark, MSCI World Index, by 9.4 percentage points annually. “We are basically long-short global stockpickers with a value bias, and we also pay close attention to the big macro picture. On the long side, we go for what we think are deeply undervalued stocks with lots of upside that we can buy at liquidation values or less. On the short side, we go for highly priced stocks with poor fundamentals that the market hasn’t focused on yet,” Katz told to Barron’s. So how did Katz do since the beginning of this year?

Katz’s 13 stock picks in large cap stocks gained 30.6% this year. His best performing picks were Cobalt International Energy CIE, SunTrust Banks STI, Citigroup C, and Morgan Stanley MS. CIE gained 97% whereas financial stocks returned between 25% and 30%.

4. John Hurley – Cavalry Asset Management: John Hurley knows how to fire artillery. He fought during the first Gulf War as an officer of the First Cavalry Division. He also knows how to pick stocks. He founded Cavalry Asset Management in 2003 and manages more than $1 billion. His 16 technology picks had an average return of 29.4% this year.

His top stock picks are Apple (AAPL), Microsoft MSFT, Qualcomm QCOM, eBay EBAY, Seagate STX, and Priceline PCLN. All of these stocks outperformed the market this year. His focus in tech stocks makes sense. John Hurley is a lecturer at Stanford’s GSB.

5. Martin Hughes, Toscafund Asset Management: Martin Hughes had a very concentrated portfolio of financial stocks. His 5 stock picks returned more than 27% this year. His top position was Citigroup.

6. Litespeed Management: Jamie Zimmerman was on Bloomberg last week having lunch with Jim Chanos and two other hedge fund guys. She likes distressed investing and thinks that buying companies that are in bankruptcy offers the best risk-return combination because there is more information about these companies than regular stocks. Well, she knows how to pick regular stocks too. Her 6 stock picks returned 26.3% since the end of 2011. The best performing stock picks were Seagate, Lyondellbasell LYB, and General Motors.

Wait a second, David Einhorn loves these stocks too, how did he do? Actually Einhorn sold out LYB but his top picks were Apple, Microsoft, GM. Seagate was his eighth largest position. Greenlight Capital’s 22 stock picks gained 20.8% this year.

We will post these rankings on our hedge fund page later this week. Let us list the performances of other well-known fund managers here:

9. Marc Lasry: 8 picks returned 25.1%

19. John Thaler JAT Capital: 29 picks returned 21.7%

26. Stephen Mandel: 40 picks returned 20.2%

30. Chase Coleman: 20 picks returned 19.2%

33. John Griffin: 39 picks returned 18.6%

43. Passport Capital: 51 picks returned 18.2%

54. Whitney Tilson: 28 picks returned 17.7%

186. George Soros: 62 picks returned 11.3%

194. John Paulson: 41 picks returned 11.1%

287. Warren Buffett: 32 picks returned 6.4%

The actual performance of these hedge fund managers may be substantially different from the the numbers we calculated. We only took into account their large-cap picks and calculated the weight of each stock based only on these positions. We also excluded options, warrants, and other securities in each fund manager’s portfolio. Hedge fund managers also don’t report their short positions which may reduce or increase their overall returns. If you are interested in customized reports or purchase our hedge fund data, just send us an email.