Best Hedge Funds in 2012

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Insider Monkey) -- We are do-it-yourself investors.

Our favorite hedge funds have outstanding long stock picks because we like to imitate these hedge fund managers and don't want to pay the customary flat fee of 2% of total asset value and an additional 20% of any profits earned.

Most hedge fund managers have more skill in picking long positions than shorting stocks, so we don't really miss out much by not handing over our hard-earned dollars to super-rich hedge fund managers.
Bruce Berkowitz

We track 375 hedge funds and prominent investors. Based on their long stock picks in their 13F disclosures, we calculated the equal-weighted average return of each hedge fund since the beginning of the year. We limited our universe to 1,000 stocks and required that each hedge fund had at least 5 picks. Here are the best hedge funds in 2012:

1. Eddie Lampert : Eddie Lampert's eight stock picks returned an average of 44.1%. This is amazing. Lampert's most successful stock pick was Sears ( SHLD).

He not only bought these shares for his fund but he also bought them for his own account as an insider of the company. Lampert paid less than $30 per share for nearly 5 million shares of Sears in early January. Is this illegal insider trading? We don't think it is. This is a great example of profitable insider trading. Lampert knows his company better than all the outsiders who were writing Sears off in January. The stock closed above $75 on Friday. Lampert personally made more than 150% from his $150 million insider purchases.

Lampert's other long positions in his portfolio were also very profitable. Seagate ( STX) returned 67%, Genworth Financial ( GNW) gained 37%, and Gap ( GPS) returned 32%. Seven out of eight Lampert stocks managed to beat the market.

2. Bruce Berkowitz: Bruce Berkowitz is a contrarian investor with a lot of conviction. His bets paid off this year. Berkowitz's 16 stock picks had an equal-weighted average return of 36%. He has more than $500 million invested in Sears, too. He is also the most bullish fund manager about Bank of America ( BAC), which returned 46% this year as of last Friday.

3. Michael Katz of Glenrock Global Partners: Michael Katz is a relatively unknown hedge fund manager. Katz's Glenrock Global Partners returned 9.6% since 2000 and managed to beat its benchmark, MSCI World Index, by 9.4 percentage points annually.