2012 was not a good year for most hedge funds. When the S&P 500 returned 16%, 88% underperformed, according to a report by Goldman Sach’s (GS) David Kostin. The performance highlights the difficulty for even the pros to beat the market. Investors could look at some of the investment strategies and ideas taken by hedge funds as a source for their own investing.
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1. Financials and Information Technology were up 23% each. The sectors accounted for more than 50% of the gains in the S&P 500. Bank of America (BAC) and Citigroup (C) undoubtedly outperformed the markets last year, along with other banks. Despite having book values substantially higher than the share price, the unknown liabilities were enough of a reason to avoid these companies. Banks still need merger and acquisition (“M&A”) and other financing activities to truly grow. Bank of America spent 2012 and previous years cutting on costs.
2. Consumer Discretionary outperformed the markets by 790 basis points in 2012. Home Depot (HD) and Amazon (AMZN) were surprisingly strong performers. Home Depot could offer moderate performance this year, but a continued rebound in US housing could benefit the company.
3. Large Capitalization companies provided stability for funds. Companies like eBay (EBAY) and Gilead Science (GILD) were solid performers. Investors could anticipate these companies will continue to do well. eBay’s PayPal unit is a consistently strong performer, while Gilead keeps reporting good results from its drug studies. Other companies to consider Amgen (AMGN) and Bank of New York (BK).
Other Investing IdeasA company that did poorly last year includes Apple Inc. (AAPL). This hurt many hedge funds, including David Einhorn. Einhorn though Apple could reach $700 back in May 2012. Although shares reached that level by September 2012, shares are now in the $450-level. Marvell (MRVL) is another company to watch. The company saw its shares drop in the last-month of 2012 at around $7. Marvell closed recently at $9.51. Picking stocks to outperform the market carries risk. Investors could also invest passively by choosing ETFs: 1) The Nasdaq index is represented with the PowerShares QQQ (QQQ) 2) The SPDR S&P 500 (SPY) mirrors the performance of the S&P 500 (Written by Kapitall Contributor Chris Lau)