BOSTON (TheStreet) -- Hedge fund managers tend to outperform during stock-market rebounds when individual investors are playing it safe. After this year's slump, analysts are expecting a brighter 2012, and hedge funds are gearing up with riskier bets.

Hedge funds, which cater to wealthy investors by chasing higher returns for bigger fees, haven't been living up to high investor expectations this year. Hennessee Group, an adviser to hedge fund investors, said its own hedge fund index is down 3% this year through October, compared with a 0.4% dip on the

S&P 500


John Paulson (Paulson & Co.)

"Renewed optimism about the U.S. economic recovery, Europe's ability to address its debt problems, and China's ability to avoid a hard landing resulted in a remarkable 'risk-on' phase," Charles Gradante, co-founder of Hennessee Group, said in an emailed statement. "It has been an extremely challenging investment environment. We have seen managers get whipsawed due to headline risks, especially related to the eurozone sovereign debt crisis."

Though returns have been poor and redemptions have been piling up since July, performance is starting to pick up, and investors might find guidance in picking stocks by following where the smart money moved during the third quarter.

Heavyweights in the hedge fund world are licking their wounds this year.

John Paulson of Paulson & Co.

, whose haul of reportedly $5 billion last year was a record for a hedge fund manager, has seen his Advantage Plus fund drop 47% this year through September, according to several media reports that cite investors in the fund. Even Paulson's bet on gold has worked against him, with his gold fund reportedly down about 30% this year.

There have been some signs of a turnaround for hedge fund managers like Paulson. Hennessee Group said its hedge fund index rose 2.5% in October, the best monthly gain this year thanks to a rebound in riskier assets. However, the broader-market index

S&P 500

jumped almost 11%, the biggest jump in two decades.

TrimTabs has more optimistic news for hedge funds in this riskier climate. Though popular perception may be to the contrary, hedge funds actually have beaten the performance on the S&P 500 over the previous six months, losing only 6.4% to the drop of more than 10% for the broader market.

Although TrimTabs says its survey of hedge fund managers reveals they remain downbeat on U.S. equities, sentiment is improving. Bearishness on the S&P 500 decreased to 41% in October from 57% in September, the highest of the year. Meanwhile, bullishness rose to 35% from 16%, the lowest level of 2011.

If the worst of 2011 is over for hedge funds, it may pay to look at

how these managers have positioned their portfolios through recently released 13F filings

. Hedge fund and investment managers who manage more than $100 million are required to disclose their equity holdings, options and convertible debt on a Form 13F filed to the

Securities and Exchange Commission

within 45 days of the end of a quarter. Funds aren't required to report short positions betting on declines, derivatives, bonds or currency bets.


pored over more than 40 third-quarter regulatory filings by some of the biggest hedge fund managers to examine where the smart money is moving. The most important trends for the quarter, broken down by sector, are highlighted on the following pages.


The energy sector saw plenty of hedge fund activity and it's no wonder why. Through Nov. 10, energy stocks in the

S&P 500

are up 3.7% this year, the fourth-best performer of the 10 sectors. In November, energy stocks are up 1.4%, the top gaining sector of the entire S&P 500. This performance comes as crude oil prices have surged from about $80 per barrel in October to more than $100.

This upward move in crude prices and energy stocks has likely benefitted a handful of hedge fund managers, assuming they continue to hold shares of oil stocks. David Tepper with Appaloosa Management,

Carl Icahn

, Harbinger Capital's Phil Falcone,

Baupost Group's Seth Klarman


SAC Capital's Steven Cohen

all upped their exposure to energy stocks during the third quarter,

It hasn't all been about the recent jump in the price of oil, though. In the third quarter, the energy sector as a whole saw earnings growth of 52%, the highest of any other sector during the quarter and by a wide margin, according to FactSet Research analyst John Butters. In addition, earnings for energy companies in the S&P 500 should climb another 4% in 2012 based on analysts' estimates.

Among the favored picks, both Tepper and Klarman picked up shares of


(BP) - Get Report

, the British oil giant still recovering from the April 2010 Gulf oil spill. Cohen's picks in the energy sector were recent spinoff

Marathon Petroleum

(MPC) - Get Report



(HFC) - Get Report

, the latter of which was also a favorite of Tepper. Icahn's only energy buy was on the soon-to-be-acquired

El Paso


, while Falcone picked up shares of

Exco Resources

, an oil and natural gas exploration company.

Interestingly, those fund managers who reduced their exposure to the energy sector -- notably Sandell Asset Management, Tudor Investment and Moore Capital -- sold shares of Exco Resources. The stock is down more than 38% this year, so perhaps they were cutting losses and moving on. However, since the end of September, shares of Exco are up more than 10%.

CVR Energy

(CVI) - Get Report

was another energy name that found hedge fund managers on either side. Eton Park and GLG Partners sold the stock while Harbinger Capital bought shares. Similarly, while Och-Ziff bought up

Exxon Mobil

(XOM) - Get Report

shares, Tudor Investment was selling.


Some of the biggest hedge fund managers were down on the materials sector during the third quarter, although one specific stock in the sector was a buy for a few fund managers, which increased their exposure to the group.

The materials sector has been the second worst of all S&P 500 sectors this year, falling about 10% through Nov. 10, according to Capital IQ. Only financials have performed worse this year as a group. Interestingly, the materials group saw the second largest increase in earnings growth during the third quarter, with profits up 35% from the prior year. Looking ahead, though, earnings are expected to grow just 12% in 2012, down from an estimate of 34% this year, according to FactSet Research.

With slowing growth on the horizon, hedge funds were jumping out of some positions in materials stock, reducing their reported portfolio's overall exposure to the sector.


(LYB) - Get Report



(MOS) - Get Report

were among the names dropped. Both stocks were sold by Third Point and Highbridge Capital. Jana Partners sold shares of Lyondell, while Viking Global sold Mosaic.

Meanwhile, Brevan Howard saw a big decline in exposure to materials stocks after the hedge fund dumped

Barrick Gold



Newmont Mining

(NEM) - Get Report

, two stocks that were sharply higher during the third quarter.

On the other hand, hedge funds like Centaurus, Farallon Capital, and Paulson & Co. all saw their portfolios increase their stakes in the materials sector. The common thread between all three is

Nalco Holding


, a water treatment and chemicals company. However, these hedge funds likely picked up shares of the company after


(ECL) - Get Report

announced in July it would buy Nalco.

John Paulson, who has seen his funds collapse this year, bought other materials companies as he increased his positions in gold-related companies like Barrick Gold,




Rangold Resources

(GOLD) - Get Report


Agnico-Eagle Mines

(AEM) - Get Report

. This came as Paulson slashed his huge position in the

SPDR Gold Trust

(GLD) - Get Report



Like the materials sector, industrials have been a dog for investors this year. Industrial companies in the S&P 500 are down 5.6% this year through Nov. 10, according to Capital IQ, the third worst sector performer this year. Unsurprisingly, hedge funds sold off shares of industrial stocks during the quarter.

While much of the selling was scattered across different subsectors, the group of industrials stocks that frequently popped up were the railroads. Vinik Asset Management,

Soros Capital

, and Caxton Associates sold stocks like


(CSX) - Get Report


Norfolk Southern

(NSC) - Get Report


Union Pacific

(UNP) - Get Report

. These stocks sold off sharply from the beginning August through September. Since the end of the third quarter, though, these names are up between 15% and 25%.

Railroad companies weren't the only transportation names sold during the quarter. Vinik also sold shares of both


(FDX) - Get Report



(UPS) - Get Report

, while Third Point dumped shares of

Swift Transportation


. Soros also sold shares of FedEx, while Omega Advisors lightened up on

United Continental

(UAL) - Get Report


There were some buyers of industrial companies during the quarter. Och-Ziff picked up a basket of industrial stocks like

United Technologies


Emerson Electric

(EMR) - Get Report



(CAT) - Get Report


General Electric

(GE) - Get Report



(DE) - Get Report

. Highbridge Capital added shares of


(PH) - Get Report



(HON) - Get Report


It remains to be seen whether those industrial bets pay off, but for now analysts are looking positively on the sector. According to FactSet Research, industrial companies in the S&P 500 should see earnings grow 13% next year, tied with consumer discretionary for the second highest growth rate for any sector. But with industrials sales up only 9% in the third quarter from a year ago and share prices slipping during August, it's easy to see why some chose to cut and run from the sector.

The outlook for consumer discretionary stocks seems to be bright. After earnings grew a solid 16% during the third quarter from a year ago, the sector is tied with industrials for second overall with an expected earnings growth rate of 13% in 2012.

Consumer Discretionary

Consumer discretionary as a whole haven't gone anywhere this year, up a paltry 2.8%. With fears that global economies could face another recession, it makes sense that individual investors aren't rushing into consumer discretionary stocks that could be hammered if spending is reined in further. For the most part, though, hedge fund managers are placing their bets in the sector, with media names getting lots of love.


Liberty Media

family of stocks --

Liberty Interactive



Liberty Media


, and

Liberty Capital


-- was particularly in focus. While hedge funds like JAT Capital, Jana Partners and Blue Ridge Capital were buyers, Soros Capital and Farallon Capital were dumping shares.

Meanwhile, as hedge funds like Eton Park,

Maverick Capital

and Lone Pine Capital were buying shares of

News Corp.

(NWS) - Get Report

, others like Viking Global were dumping shares. The same was true for



, with Eton Park and Maverick buying as Farallon and Viking selling.

There were some other interesting moves in consumer discretionary stocks. Among hedge funds increasing their reported portfolio's exposure to the sector, names like

Las Vegas Sands

(LVS) - Get Report


Virgin Media









(CMCSA) - Get Report


Deckers Outdoor

(DECK) - Get Report


Family Dollar


were among the stocks that saw buying.

Consumer Staples

With the global economy at risk due to the European crisis and market volatility scaring investors, it's natural to believe the right place to be invested would be consumer staples. These are companies that are defensive, cyclical names which can help protect against downside risk. For the hedge funds that materially changed what they did with their consumer staples holdings, most were buyers.

Unfortunately, there hasn't been a whole lot of growth opportunity in consumer staples stocks. The overall sector is up 5.4% this year -- third best among all S&P 500 sectors -- but worries over growth remain. One of the main reasons is because domestic growth is slowing, forcing these staples companies to depend on international growth.

In the third quarter, earnings grew by only 6% from a year ago, the second worst earnings growth rate among all S&P 500 sectors. Based on estimates, consumer staples will see earnings rise 9% in 2012, according to FactSet Research, below the growth rates of industrials, technology and even consumer discretionary names.

For that reason, it was hard to find hedge funds that made big alterations to their holdings of consumer staples stocks. The few fund managers who did make big changes increased their reported portfolio's exposure to the sector, rather than sell shares of staples.



Kraft Foods


was one stock that several hedge fund managers picked up in the third quarter. Moore Capital's Louis Bacon, George Soros, and

Pershing Square's Bill Ackman

all bought shares of Kraft last quarter. During the quarter, Kraft shares fell about 5%, although the stock has rebounded more than 3% since Sept. 30.

Moore Capital was more active in the staples space, also picking up shares of


(MO) - Get Report


Procter & Gamble

(PG) - Get Report



(PEP) - Get Report

. Soros also picked up shares of Pepsi as well as

Sara Lee



Elsewhere, Maverick Capital's Lee Ainslie was in the mood for chicken and beer, buying up shares of

Anheuser-Busch InBev

(BUD) - Get Report


Sanderson Farms

(SAFM) - Get Report


Health Care

The health care sector was a popular one in the third quarter for hedge fund managers looking for merger-arbitrage opportunities. Takeover targets like

Kinetic Concepts




Medco Health Solutions


were snatched up during the quarter, increasing health care weightings for several hedge fund managers.

The merger activity is one way to explain the strong performance of the health care sector this year. Health care names in the S&P 500 are up 6.1% overall, according to Capital IQ, the second best sector performance this year. The outlook for health care stocks, though, leaves plenty to be desired. After notching only 7% earnings growth in the third quarter, analysts are only calling for 5% earnings growth for the sector in 2012. In addition, health care companies will be in limbo as President Obama's health care reform bill gets challenged in the courts.

If they weren't playing M&A activity in the sector, hedge fund managers were selling for the most part.


(PFE) - Get Report

was a popular name to sell, with

David Tepper's Appaloosa Management


David Einhorn's Greenlight Capital

reducing their holdings in the drugmaker. Tepper also sold shares of fellow drug stock


(MRK) - Get Report

, as well as


(MDT) - Get Report


UnitedHealth Group

(UNH) - Get Report


Elsewhere, Steven Cohen's SAC Capital sold out of



, which had been one of the hedge fund's largest holdings before the stock crumbled. Cohen's fund also sold shares of

Tenet Healthcare

(THC) - Get Report


Express Scripts




(NVS) - Get Report

, among others.

Meanwhile, both Blue Ridge Capital and

Omega Advisors

cut their holdings in

Teva Pharmaceutical

(TEVA) - Get Report

, although that may be due to the fact that the company's shares fell very sharply in August.


Given the sharp drop in financial stocks this year, it should come as no surprise that hedge fund managers were dumping shares during the third quarter. There was nearly uniform disgust with U.S. bank stocks like

Bank of America

(BAC) - Get Report



(C) - Get Report


JPMorgan Chase

(JPM) - Get Report

, which had all been big winners for hedge fund managers who bet on their recovery after the financial collapse in late 2008.

Financials as a group are the worst performing sector on the S&P 500, down 19% this year through Nov. 10, according to Capital IQ. That performance may have been too much for the likes of David Tepper. His Appaloosa Management hedge fund completely sold out of its positions in Bank of America,

Wells Fargo

(WFC) - Get Report


Fifth Third

(FITB) - Get Report



(MET) - Get Report

. He also reduced his Citigroup stake.

Others followed in Tepper's footsteps, with Eton Park, Paulson & Co., Glenview, Maverick Capital, and Lone Pine Capital among the other big hedge funds slashing their U.S. bank holdings. Among other interesting sales, Bill Ackman's Pershing Square sold shares of

Greenlight Capital Re

(GLRE) - Get Report

, John Paulson sold

State Street

(STT) - Get Report


NYSE Euronext


, and Maverick Capital dumped shares of


(BLK) - Get Report


Though it may be hard to believe, some hedge fund managers were buyers of financial stocks last quarter, which increased their reported portfolio's sector weighting. Most notably, Caxton Associates bought shares of Bank of America and Wells Fargo, among others. David Einhorn's Greenlight Capital picked up shares of

Legg Mason

(LM) - Get Report


Whitney Tilson's T2 Partners

was a buyer of Citigroup and

Goldman Sachs

(GS) - Get Report


These financial buyers may not be completely crazy. If there's one reason for optimism, next year's earnings growth may be it. According to FactSet Research, financials should see earnings growth of 25% in 2012, the highest based on analysts' estimates of all sectors. It remains to be seen if the European debt crisis and the exposure to those troubled countries derails those rosy forecasts.

Information Technology

The technology sector gets a lot of attention from hedge funds, mostly because it seems like everyone wants to own shares of


(AAPL) - Get Report

. The truth, though, is that the sector has performed admirably this year and should do well into 2012 based on analysts' estimates.

Through Nov. 10, the tech sector of the S&P 500 has climbed 2.4%, falling in the middle of the pack of the 10 sectors of the broad market index. Looking ahead to 2012, analysts expect earnings for the sector to grow 11%, which is a fine enough number but one that also ultimately falls in the middle of the pack.

As tech isn't excelling when it comes to performance or earnings growth expectations, hedge funds managers are predictably found on the opposite sides of stock bets. The 13F system isn't perfect, as we can't tell whether ownership of a stock means the hedge fund manager loves the company or is simply hedging a short position. That said, it's interesting to look at opposing views based on these filings.

Apple is the perfect example. In the second quarter, Apple was among the most held of any stock by hedge funds and it may be likely to repeat again in the third quarter. Viking Global, Greenlight Capital, Omega Advisors, Soros Capital and Citadel all bought shares of the gadget maker during the third quarter. But on the other hand, hedge funds like Bridgewater Associates, Moore Capital, Vinik Asset Management and Tudor Investment dumped shares of the company during the quarter.

The same story holds true among the other big tech stocks. Farallon Capital and Citadel bought


(GOOG) - Get Report

as Moore Capital and Tudor sold. Brevan Howard picked up


(CSCO) - Get Report

while Bridgewatch cut its holding.

Third Point

, Viking Global, and Soros bought



shares while JAT Capital sold the stock.


(ORCL) - Get Report



(MSFT) - Get Report



(QCOM) - Get Report

all faced the similar push-and-pull.


The telecom sector evokes yawns from the casual investor. Hedge fund managers, too, find little to be excited about in the sector. With telecom shares down 3% this year through Nov. 10, investors bored with wireless companies look smart to have skipped the sector.

The reasons for the aversion are simply because there's little growth to be had. FactSet Research has the telecom sector growing earnings by only 8% next year based on analysts' estimates, a far cry from the 25% expected earnings growth in financials or even 13% expected growth in consumer discretionary and industrials. By comparison, telecom companies in the S&P 500 saw earnings grow 17% during the third quarter.

Though certainly not the sexiest sector, some hedge fund managers increased their reported holdings during the third quarter. The most notable call was by Centaurus, which picked up shares of

Level 3 Communications


, a stock that has surged nearly 40% this year. Glenview, meanwhile, made a third-quarter buy of

American Tower

(AMT) - Get Report


Elsewhere, Moore Capital's Louis Bacon made several buys, picking up shares of


(T) - Get Report



(VZ) - Get Report



(CTL) - Get Report



(BCE) - Get Report



(WIN) - Get Report



If there is one sector more boring that telecom, it's utilities. Though many are big dividend payers, there's little excitement in owning an electricity company. Making matters worse, the utility sector saw a meager 5% increase in earnings from a year ago, according to FactSet Research, the lowest growth rate of all 10 sectors of the S&P 500. Looking ahead, utilities are the only sector expected to see earnings shrink in 2012, with analysts' estimates calling for a 2% slide.

Despite those negatives, utility stocks have been the best performers this year on the S&P 500, climbing 10.7% in 2011 through Nov. 11. Boring and unsexy is much more palatable if it means getting a big return. However, hedge funds aren't making big changes to their exposure to the sector.

Louis Bacon's Moore Capital is one of very few funds to increase its portfolio weighting for the utility sector. During the third quarter, Moore Capital bought shares of

PPL Corp.

(PPL) - Get Report


Southern Company

(SO) - Get Report


Westar Energy


. The three stocks were mixed in the third quarter, with Southern up 5%, PPL up 2.5% and Westar down 1.8%.

On the other hand, Avenue Capital lowered its utilities holdings after dumping shares of



. The stock has fallen more than 50% this year,

-- Written by Robert Holmes in Boston


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Robert Holmes


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