Billionaire Bruce Kovner’s Trading Strategy and Top 10 Picks

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In this article, we will review billionaire Bruce Kovner's trading strategy and top 10 picks. You can skip our detailed analysis of Kovner's hedge fund performance and go directly to Bruce Kovner's Trading Strategy and Top 5 Picks.

Macro hedge fund Caxton Associates generated its best returns in 2020 since Bruce Kovner stepped down in 2011 and Andrew Law took the helm of one of the world’s oldest hedge funds. Indeed, the firm extended the gains into the first quarter of 2021, thanks to its bets on materials, finance, and utility, and information technology stocks. The firm's strategy of diversifying its portfolio towards real estate, industrials, and a few other sectors also helped in posting big profits. Instead of holding stocks for the long-term, Caxton Associates believes in following market trends and making gains from short-term price movements.

Caxton added 90 stocks in the December quarter and sold out 241 stocks. The average time held in the top ten positions is around 0.50 quarter. Founded in 1983 by Bruce Kovner, the London-based Caxton Associates is a global macro hedge fund with $22.6 billion in assets under management. Its 13F securities value of the hedge fund stood at around $1.4 billion at the end of last year. Kovner started trading in 1977 with borrowed $3,000. His first two bets generated a return of $1000. Kovner is a risk taker. Here is what Kovner said about risk management:

“The first rule of trading — there are probably many first rules — is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand. I would say that risk management is the most important thing to be well understood. Under trade, under trade, under trade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.”

Under Andrew Law, Caxton continues following market trends and betting on low volatility sectors. Law’s strategy of enlarging stakes in utilities led the way for posting strong returns for the first quarter. The utility sector weighted around 17% of the overall portfolio.

Caxton Associates also doubled down its stakes in industrial stocks and ETFs. The hedge fund's substantial position in the materials sector was the key driver behind Caxton's 36% return in 2020. The firm ended the year with 45% of 13F portfolio allocation towards the Materials sector. Andrew Law held 2.5 million shares of SPDR Gold Trust (NYSE: GLD) at the end of the last year, accounting for 31.15% of the overall portfolio.

Andrew Law is famous for his macro trading and portfolio management strategies, including directional trading in the foreign exchange, global interest rate, commodities, and equity markets. Before joining Caxton Associates, he had worked for Goldman Sachs in 1996. Law was responsible for Goldman Sachs' London proprietary trading business. He was also a proprietary trader at Chemical Bank.

Bruce Kovner's Trading Strategy and Top 10 Picks
Bruce Kovner's Trading Strategy and Top 10 Picks

Bruce Kovner of Caxton Associates LP

While Bruce Kovner's reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s start digging into Caxton Associates top 10 picks that helped in generating robust returns for the first quarter:

Billionaire Bruce Kovner's Trading Strategy and Top 10 Picks

10. Microsoft Corporation (NASDAQ: MSFT)

Number of Hedge Fund Holders: 258

The technology giant Microsoft Corporation (NASDAQ: MSFT) represented 0.78% of Bruce Kovner's 13F portfolio at the end of December. Shares of Microsoft rallied 17% since the beginning of this year, extending the twelve-month gains to 52%. The company’s solid financial growth momentum has been backing its share price appreciation.

Alger, an investment management firm, stated in the fourth quarter investor letter that Microsoft Corporation (NASDAQ: MSFT) is a smart long-term buy. Here’s what Alger said:

“Microsoft Corporation was among the top contributors to performance during the quarter. Microsoft is a Positive Dynamic Change beneficiary of corporate America’s transformative digitization. Microsoft’s enterprise cloud product, Azure, is rapidly growing and accruing market share. Recently, Microsoft reported that Azure grew 50% during the fourth quarter. This high unit volume growth is a primary driver of the company’s higher share price, but Microsoft’s operating execution has enabled notable margin expansion that has also helped to increase forward earnings estimates. Microsoft Corporation (NASDAQ: MSFT) ’s subscription-based software offerings and cloud computing services have not been entirely immune to the pandemic-related economic slowdown but are resilient because they enhance customers’ growth initiatives and help them to reduce costs. Additionally, investors appreciate Microsoft’s strong free cash flow generation and its return of cash to shareholders in the form of dividends and share repurchases.”

9. NextEra Energy, Inc. (NYSE: NEE)

Number of Hedge Fund Holders: 61

Bruce Kovner’s Caxton Associates initiated a position in NextEra Energy, Inc. (NYSE: NEE) during the December quarter by purchasing 149,279 shares. The share price of the utility company underperformed since the beginning of this year. However, the company returned cash to investors in the form of dividends. Its dividend yield is currently standing around 1.97%. NextEra Energy, Inc. (NYSE: NEE) stock is weighted around 0.80% of Caxton’s 13F stock portfolio.

NextEra Energy, Inc. (NYSE: NEE) was in 61 hedge funds’ portfolios at the end of the fourth quarter of 2020 compared to 64 positions in the previous quarter.

8. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)

Number of Hedge Fund Holders: 72

Caxton Associates dropped its position by 22% in Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) during the fourth quarter. Despite that, Taiwan Semiconductor accounted for 1.12% of the overall portfolio at the end of December. The share price of chip-maker rallied 8% this year, accelerating twelve-month gains to 125%.

In the Q4 investor letter, Bonsai Partners highlighted a few stocks including Taiwan Semiconductor. Here is what Bonsai Partners stated:

“Taiwan Semiconductor is the world’s largest outsourced foundry of logic semiconductor chips. TSMC’s shares appreciated 34.5% during the quarter. Taiwan Semiconductor continues to see unprecedented demand, albeit at a slightly less rapid growth rate than earlier in 2020. At the time of writing, Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) announced strong fourth-quarter results and staggering growth in their expected capital expenditures for 2021 – growing from $17B in 2020 to $25B to $28B in 2021. Forward-looking capital expenditures are the key leading indicator of their medium-term growth rate expectations, and I expect TSMC management will continue to earn excellent returns on these colossal investments.

Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)'s capital expenditure growth is likely due to investment in their new U.S. manufacturing footprint, rapid investment in their cutting edge process technology, as well as generally high levels of customer demand. Lately, we’ve seen semiconductor shortages in some of their less advanced process technologies, emphasizing the current state of the semiconductor supply-demand imbalance.”

7. Apple Inc. (NASDAQ: AAPL)

Number of Hedge Fund Holders: 146

The world's largest technology giant Apple, Inc. (NASDAQ: AAPL) gained Bruce Kovner’s hedge fund's confidence during the fourth quarter. The firm raised its stake in the iPhone maker by 2496% in the December quarter to 1.33% of the overall portfolio. Apple stock price underperformed this year following substantial growth in 2020.

Alger Spectra Fund mentioned a few stocks including Apple in the fourth quarter investor letter. Here is what Alger Spectra Fund stated:

“Long position Apple Inc. was among the top detractors from performance. Apple is a leading technology provider in telecommunications, computing and services. Apple, Inc. (NASDAQ: AAPL) ’s iOS operating system is the company’s unique intellectual property and competitive strength. This software drives extremely tight engagement with consumers and enterprises. This tight engagement is facilitating significant growth in high margin services like music, apps and Apple Pay. Apple’s continued development of these high-margined services and earnings for wearable products such as the Apple, Inc. (NASDAQ: AAPL) Watch as well as the introduction of 5G phones is enhancing Apple’s growth. The shares detracted from portfolio performance as estimates of iPhone production were cut due to easing demand for the 12 Pro model and a normalizing inventory level.”

6. Micron Technology, Inc. (NASDAQ: MU)

Number of Hedge Fund Holders: 100

Caxton Associates added significantly to its existing Micron Technology, Inc. (NASDAQ: MU) position during the December quarter. MU accounted for 1.95% of Bruce Kovner’s 13F portfolio at the end of 2020. Shares of Micron Technology jumped 14% year to date and grew 96% in the last twelve-month, thanks to robust revenue growth momentum.

Fiduciary Management Inc., an investment management firm, stated in the first quarter investor letter that Micron Technology, Inc. (NASDAQ: MU) is a smart long-term buy. Here is what Fiduciary Management said:

“Micron Technology, Inc. (NASDAQ: MU), founded in 1978 and headquartered in Boise, Idaho, is focused on the production of innovative memory and storage solutions. Approximately 70% of its revenue (85% of operating income) comes from dynamic random-access memory (DRAM) and 25% from “not and” (NAND) solid storage, and the balance from other emerging memory technologies. By broad market segment, 2020 sales were approximately 25% Mobile, 20% Client and Graphics, 20% Enterprise and Cloud Server, 20% Solid State Storage Devices, and 15% Automotive, Industrial, and Consumer.”

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Disclosure: None. Billionaire Bruce Kovner's Trading Strategy and Top 10 Picks is originally published on Insider Monkey.