What do the world's top hedge funds look like? The obscure corner of Wall Street has long been insular, inaccessible, and almost entirely disconnected from the individual investor. No matter, the field has still been romanticized and played up in Hollywood and the media for years on end.
In truth, retail investors should be grateful they don't have access to hedge funds, which limit access to high net worth individuals, pension plans, insurance companies, universities and the like. In truth, hedge funds charge enormous fees -- typically 2% of assets under management and 20% of gains -- that simply aren't justified by their returns.
Hedge funds, which are designed to only go up (that is, make money in bull markets but not lose money in bear markets) have been consistently underperforming the S&P 500. In 2019, they rose 8.5%, compared to the S&P's 29.1%.
That said, not all of them are lousy. In fact, some of the best hedge funds are time-tested, market-walloping machines. Here's a look at five of the top hedge funds in the world and the strategies they utilize:
-- Renaissance Technologies (Medallion fund)
-- Bridgewater Associates
-- Pershing Square
-- Jana Partners
-- Tiger Global Management
1. Renaissance Technologies (Medallion fund)
In the ultra-competitive, dog-eat-dog world of Wall Street, it's awfully hard to be the best. It's even tougher to stay at the top. For decades on end now, one fund has quietly crushed the market by margins so large they'd make Warren Buffett blush.
"With 66% average annual returns since 1988 -- 39% after fees -- Renaissance's Medallion fund is in a league of its own," says Gregory Zuckerman, a special writer for The Wall Street Journal and the author of "The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution."
"Their advantages include better talent, a unique management approach and a strategy of betting on the relationships among investments, rather than wagering on which will rise and fall," Zuckerman said.
The fund, which is closed to new investors and only allows Renaissance employees to put their money in, uses a bit of a black-box strategy, staying very secretive about what exactly the secret sauce consists of. What is known, however, is that the Medallion fund employs a "quant" strategy, trading largely on data and mathematical relationships rather than fundamentals, and often owning positions for extremely short periods of time.
Renaissance's founder, Jim Simons, is a bit of a mathematical genius, beginning his career as a mathematician and achieving breakthrough discoveries that led to the development of string theory. He later worked as a codebreaker for the National Security Agency before starting his own hedge fund.
2. Bridgewater Associates
Bridgewater Associates is the biggest hedge fund in the world, managing about $160 billion in investor money. Founded by Ray Dalio out of his apartment in 1975, the company shares some similarities with Renaissance -- most importantly, the principle of building up massive troves of data and allowing an algorithm to make investment decisions.
Although the proverbial investing machine has proved its mettle over time, it's still not infallible. Bridgewater's flagship fund, Pure Alpha II, actually lost ground in 2019, falling 0.5%. That said, Pure Alpha II, a "macro" fund focused on investing in global trends, hadn't posted a losing year before that since 2000.
Another thing setting Bridgewater apart is its culture, which Dalio has carefully engineered through the decades. The firm prizes "radical transparency," encouraging blunt feedback between co-workers in an effort to foster an idea meritocracy. While this entails a higher turnover rate, it also seems to have worked.
3. Pershing Square
Getting away from data-obsessed, extremely secretive firms like Renaissance Tech and Bridgewater Associates, Pershing Square Capital Management is another one of the top hedge funds in the world. Run by Bill Ackman, a savvy Wall Street billionaire, the fund's top holding, a closed-end fund that individual investors can buy into on over-the-counter markets, Pershing Square Holdings (ticker: PSHZF), rose 58% in 2019.
Ackman is considered an activist investor, spotting companies with the potential to create a lot of value, then acquiring a large stake and agitating as a shareholder for changes that will drive up the stock price. Alternatively, Ackman sometimes sells stock short in a company that's struggling or that his research indicates is worth far less than it's trading for, then makes his concerns and research public in an effort to persuade the market.
Launched in 2004, Ackman became famous for a reason, beating the S&P for seven straight years, and making various successful bets including Wendy's ( WEN), Target ( TGT), General Growth Properties and Canadian Pacific Railway ( CP). A horrible losing stretch between 2015 and 2018, characterized by a record $4 billion loss in Valeant Pharmaceuticals -- since renamed Bausch Health Companies ( BHC) -- seems to have recently been broken.
4. Jana Partners
Another firm using a strategy similar to Ackman's is Jana Partners, run by Barry Rosenstein, considered one of the top hedge fund managers in the game. Founded in 2001, it claims to ignore the crowd, and typically focuses on value stocks in its "event-driven," or activist, endeavors.
Like many of its peers, Jana Partners is essentially a fund family of sorts, offering multiple different funds with different focuses. The one it's become famous for, agitating for change at companies like Whole Foods, Tiffany ( TIF) and Apple ( AAPL) (to name a few), is called Jana Strategic Investment (JSI). Between 2010 and 2019, JSI returned 15% annually.
Recently, the firm shuttered two normal equity-focused hedge funds to open an ESG-focused event-driven fund, Jana Impact Capital.
5. Tiger Global Management
Last but not least, Tiger Global Management has been one of the world's top hedge funds for several years now. Founder Chase Coleman is a disciple of hedge fund legend Julian Robertson, whose Tiger Management was legendary on Wall Street, beginning with $8 million in 1980 and reaching $22 billion in assets by 1998.
As far as reported long positions go, Tiger Global was the single best performer among large hedge funds between 2016 and mid-2019, returning 22.4% annually.
With over $36 billion in assets under management and just $18 billion in long positions, the rest of that money is spread among investments it doesn't have to disclose, like shorts and private seed investments.
One advantage of being a well-capitalized hedge fund is the ability to finance hot companies that aren't yet public, something mutual funds can only do to a very limited degree. Tiger Global has enjoyed some great private equity investments over the years, funding companies like Facebook ( FB), Alibaba Group Holding ( BABA), Uber ( UBER), Airbnb, Stripe, LinkedIn, Juul, Flipkart and Square ( SQ) when they were privately held.