Galt& Taggart published a report on the positioning of Top Performing Hedge Funds. As of the document, Galt&Taggart analyzed some of the top-performing hedge funds with AUM above US$ 5.0bn that managed to outperform the market in 18 months since 2021.

According to the document, during sharp market downturns, equities are trading at significantly discounted prices. This is partly attributed to downgraded valuations (strategic reason) and partly to reduced liquidity in general equity markets (tactical reason). During such times of turmoil, many investors struggle to navigate the market and often make investment decisions not aligned with their personal financial interests and risk appetite. Behavioral biases, such as panic selling or random buying due to the fear of missing out play a key role in this issue.

In contrast, those with the highest competence, experience, and access to up-to-date information make the most use of the market ‘cheapness’ by selecting financial products undervalued the most. Hedge funds, which are pooled investment funds that trade the investment capital collectively, employ sophisticated valuation and risk management techniques. Such superior expertise allows these funds to beat the market return consistently and considerably. Traditional hedge funds are long position only; however, short selling is also becoming popular, especially among the recently established funds.

It is noteworthy that the highest return potential is typically achieved during the nearest 3 months following market bottoms. While the bull markets typically last significantly longer than the bear markets, the highest proportional return on investment is extremely high in the early phase of the market rally and moderates considerably afterwards. This is illustrated in the chart below by relatively prolonged market declines (red areas) accompanied by short-lived periods of peaking quarter-over-quarter percentage returns (green areas). The abovementioned funds position their capital in a way not to miss such investment opportunities that occur very rarely.

Performance and Positioning of Select Funds

To provide a valuable insight on potentially profitable investment opportunities, we have analyzed some of the top performing hedge funds with AUM above US$ 5.0bn that managed to outperform the market in 18 months since 2021. On average, these funds have delivered 15x the cumulative return of S&P 500 from 2021 to mid2022, while the figure is 25x for the top 3 highest performing funds.

In following parts of the report, we have decomposed the portfolios of these funds, listing their top 10 holdings as well as the most recent asset additions and disposals. Interestingly, Consumer Discretionary, Information Technology, Financials, and Health Care are the sectors these selected hedge funds are most heavily invested in. Moreover, FAAMG stocks (excluding Meta Platforms) are particularly popular single stock choices.