The World’s Best Hedge Funds’ Stock Picks For 2021

The World’s Best Hedge Funds’ Stock Picks For 2021
Reda Farran, CFA

about 3 years ago3 mins

Mentioned in story

What’s going on here?

Several stock-picking hedge funds enjoyed stellar returns in 2020 (see Related Content, below). And many are quietly confident that they’ll repeat that success this year, with a favorable environment creating a wealth of opportunities both to back companies’ shares and – in spite of Reddit’s opposition – to sell them short as well.

What does this mean?

Pandemic-powered volatility made last year one of the best in a decade for many stock-focused hedge funds: several posted gains of more than double the US S&P 500 index’s 16% return.

While volatility has been relatively muted by contrast in 2021 so far, another factor looks to be on the stock-pickers’ side: increasing stock dispersion. Put simply, individual stock prices aren’t moving much in tandem – creating outperformance opportunities for those able to make judicious investment choices.

The average three-month inter-stock correlation is hovering close to zero (Source: Goldman Sachs)
The average three-month inter-stock correlation is hovering close to zero (Source: Goldman Sachs)

Hedge funds are hoping that ultra-low interest rates, economy-boosting stimulus packages, and normality-restoring vaccine rollouts will push selected stocks much higher. And they reckon the best buying opportunities are likely to be found outside the US, where valuations are currently sky-high.

On the short side, meanwhile, retail investors’ enthusiasm may be creating an environment rich in targets to bet against. Short-selling hedge funds are also eyeing up some of last year’s best-performing stocks – especially those with particularly high share prices relative to their profits and with business models that might not hold up once people begin to return to their pre-pandemic routines.

Why should I care?

If last year’s big winners manage to replicate their success this year, then they’ll do it through the following stocks, among other things. These might provide you with a few ideas to investigate for inclusion in your own portfolio.

Calixto Global Investors, which returned 47% last year, is betting big on two Japanese firms: Demae-Can, which controls a third of the country’s food delivery market, and Outsourcing Inc, a staffing specialist gaining ground after several smaller competitors went bust last year. On the short side, Calixto is betting against companies in the software, ecommerce, and mobile gaming sectors.

Hampton Road Capital Management also returned 47% last year and lists Nexstar Media Group as one of its top picks for 2021. Nexstar, the US’s largest local TV company, pays a steady dividend, while its valuation multiple – its market value relative to next year’s earnings – is in the single digits, versus 25x for the S&P 500 overall. Hampton Road is also shorting a basket of stocks popular among retail investors but with weak fundamentals.

Marlowe Partners, which posted a 37% gain last year, is backing three rather different companies. CVS Group, one of the largest veterinary services providers in the UK (not to be confused with the American healthcare firm), is benefiting from increasing pet ownership amid the pandemic. Fluidra, a Spanish swimming pool builder, is benefiting from a construction and maintenance backlog. And Callaway Golf is benefiting from an ongoing influx of socially distanced golfers currently underserved by rival sports firms.

Last but not least, Clearfield Capital Management, which returned 21% last year, has invested in two European payments companies, Nexi and Worldline as the pandemic accelerates a long-term shift away from cash. Clearfield also has a big position in Dufry, a Swiss operator of duty-free stores which recently agreed a joint venture with Alibaba aiming to bolster its presence in China.



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