In this article, we discussed Two Sigma Advisors‘ performance during the first quarter of 2021 and the fund’s top 10 stock picks as of the end of 2020. We also reviewed the 10 best stocks to buy now according to quant billionaires. Click to skip ahead and see the 5 Best Stocks To Buy Now According To Quant Billionaires.
Quant billionaires John Overdeck and David Siegel’s quant hedge fund Two Sigma has extended losses during the first quarter of this year. The firm’s flagship Spectrum fund fell almost 2% year to date while the global macro Compass fund plunged 13% and the Absolute Return fund dipped 3%. Losses were initially blamed on volatility amid the onslaught of Reddit and retail investors. In January alone, New York-based Two Sigma lost 8.6% for its Absolute Return Enhanced fund and 5.3% for its Absolute Return fund.
Computer-powered strategies that rely on historical data to predict future trends presented disastrous results for the quant funds since the beginning of 2020. Credit Suisse claims that quant funds have slashed almost half of their portfolio size during the month of March and their average return plunged to negative 14% this year.
Two Sigma Advisors, which was considered one of the best performing quant hedge funds over the last two decades, has also been struggling due to exceptional market trends. This is contrary to quantitative trading strategies that study a large amount of historic data to predict future trends. Apparently, Two Sigma cofounders’ strong educational background and decades of experience in developing algorithm techniques and trading strategies have not been working for their quant hedge fund over the last few months amid unprecedented volatility.
John Overdeck of Two Sigma Advisors
The mathematician John Overdeck’s and Computer scientist David Siegel’s quantitative strategies have pushed their quant funds assets under management to $60 billion in 2019 from $8 billion in November 2011. Both John Overdeck and David Siegel worked for a quant hedge fund D.E. Shaw & Co before founding their own quant hedge fund. The duo has more than 40 years of experience in developing computer-powered trading models. John Overdeck worked as Managing Director at D.E. Shaw & Co. John did B.S. in Mathematics and M.S. in Statistics. He won a silver medal when he was only 16 years old in the International Mathematical Olympiad. The other co-founder David Siegel, who worked for D.E. Shaw as a Chief Information Officer, has a Ph.D. in Computer Science.
“Quants rely on data from time periods that have no reflection of today’s environment,” said Adam Taback, a chief investment officer of Wells Fargo Private Wealth Management.
“When you have volatility in markets, it makes it extremely difficult for them to catch anything because they get whipsawed back and forth.”
At the end of the fourth quarter, the market value of the Two Sigma Advisors’ 13F portfolio stood at around $37 billion, down from $43 billion in the prior-year period. The New York-based quant hedge fund initiated a position in 343 stocks and increased its existing stake in 802 stocks. The firm also sold out 360 stocks and reduced its exiting position in 1206 stocks. The time held for the top ten positions averages around 1.85 quarters. Billionaires John Overdeck and David Siegel’s quant hedge fund has spread investments across several sectors, including consumer discretionary, information technology, and health care.
David Siegel of Two Sigma Advisors
While John Overdeck’s and David Siegel’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s now start reviewing the 10 best stocks to buy now according to quant billionaires. These stocks are the top picks of quant billionaires John Overdeck and David Siegel.
10. Zoom Video Communications, Inc. (NASDAQ: ZM)
The quant hedge fund raised its stake in Zoom Video Communications, Inc. (NASDAQ: ZM) by 186% in the fourth quarter to 1.01% of the 13F portfolio. The firm first initiated a position in the video calling company in Q4 of 2019. The share price of Zoom Video fell significantly in the December quarter and extended the downtrend into 2021. Its shares are down 33% in the last six months.
Baron Opportunity Fund, which returned 23.02% (institutional shares) in Q4, highlighted a few stocks including Zoom Video in the fourth-quarter investor letter. Here’s what Baron Opportunity Fund stated:
“Zoom Video Communications, Inc. is a cloud-based software company providing a video-first platform for communication. Shares of Zoom declined during the fourth quarter on profit-taking following the strong run in the stock because of accelerated pandemic-driven Zoom adoption, revenue growth, and free cash flow generation. We retain conviction as Zoom remains a leading player in disrupting the $100 billion unified communications market with its scalable, globally distributed, cloud-based, video-first offering, while its well-known brand (Zoom is now a verb!) should enable it to grow profitably as it takes market share.”
9. Merck & Co. Inc. (NYSE: MRK)
Shares of Merck & Co. Inc. (NYSE: MRK) fell more than 4% during the first quarter of 2020. It is one of the permanent members of Two Sigma Advisors’ stock portfolio since 2010. The firm increased its position in Merck by 7% to 4.74 million shares during the fourth quarter. It is ranked ninth in the list of 10 best stocks to buy now according to quant billionaires.
Merck also experienced an increase in enthusiasm from the smart money in recent months. It was in 82 hedge funds’ portfolios at the end of December. The all-time high for this statistic is 84.
8. Abbvie Inc. (NYSE: ABBV)
Two Sigma lowered its position in Abbvie Inc. (NYSE: ABBV) during the fourth quarter by 15% to 3.65 million. The firm first initiated a position in the health care company in 2013. Following a strong rally in the December quarter, shares of Abbvie underperformed so far in 2021. Abbvie offers a healthy dividend yield of 4.87%, which makes it a good stock to buy and hold. ABBV ranks 8th in the list of 10 best stocks to buy according to quant billionaires.
The number of bullish hedge fund bets on AbbVie increased by 1 in recent months. It was in 83 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all-time high for this statistic is 89.
7. The Home Depot, Inc. (NYSE: HD)
The share price of Home Depot, Inc. (NYSE: HD) accelerated the upside momentum into 2021. Its shares are up close to 60% in the last twelve months. The firm first initiated a position in Home Depot in 2013 and reduced its stake by 10% in the December quarter. Despite that, quant billionaires held 1.55 million shares of the home improvement company.
HD ranks 7th in the list of 10 best stocks to buy according to quant billionaires.
Madison Funds, an independent investment management firm, highlighted a few stocks including The Home Depot in the fourth-quarter investor letter. Here is what Madison Funds stated:
“At the very end of the year, we received cash for our shares of HD Supply, which had agreed to be acquired by Home Depot. We initially invested in the summer of 2019, so it was a short but successful investment. It’s full circle for Home Depot, as this was a business that it used to own (no prize for guessing what the “HD” in HD Supply stood for) but had divested in 2007 when a new CEO took over and was intent on simplifying the company to clean up the mess created by his predecessor. Today, Home Depot is much stronger company, and HD Supply too is a much stronger and more focused company, having itself shed many businesses to concentrate on its crown jewel, the facilities distribution business. While we certainly contemplated that it might get acquired at some point given that there were a handful of logical buyers, our investment didn’t rely on that happening. We would have been happy to hold on for a longer ride. But we’re not going to complain about a bird in hand.”
6. Target Corporation (NYSE: TGT)
The general merchandise retailer Target Corporation (NYSE: TGT) continues to generate big returns for investors in 2021. Its shares rose 15% year to date and are up 109% in the last twelve months. Strong revenue growth trends are backing TGT share price. It is ranked sixth in the list of 10 best stocks to buy now according to quant billionaires.
TGT ranks 6th in the list of 10 best stocks to buy according to quant billionaires.
Investors should be aware of an increase in enthusiasm from smart money lately. Target Corporation was in 78 hedge funds’ portfolios at the end of December. The all-time high for this statistic was previously 57. This means the bullish number of hedge fund positions in this stock currently sits at its all-time high.
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