The Top Hedge Fund Buys From the Third Quarter

Major hedge funds once again shook up their portfolios during the third quarter. Here are some of the top hedge fund buys.

It’s been almost a week since the 13F feeding frenzy. Each quarter, major hedge funds and firms that manage over $100 million have to tell the world what stocks they own by filing a form 13F with the SEC. 

As always, there’s a caveat when following hedge funds and billionaires. These quarterly filings are delayed by up to 45 days and don’t include all of a fund’s holdings, such as short positions or how much cash the portfolio holds.  

Regardless, the media places major hedge funds on a pedestal, making their buys and sells market-moving news. That said, it is worth noting that some hedge fund managers are very smart and have become billionaires through very smart investments. So it’s informative to check in on how these smart individuals are investing.

I’ll begin with the biggest name in the business, Warren Buffett and his Berkshire Hathaway (NYSE: BRK.B). 

Something that stood out to me about Berkshire’s recent filing was Buffett’s increased ownership of DirecTV (NASDAQ: DTV) and Charter Communications, Inc. (NASDAQ: CHTR). He increased his share count in those two firms by 27% and 114%, respectively. 

DirecTV is in the process of being bought out by AT&T (NYSE: T). If approved, the deal would be worth around $95 a share for DirecTV. Meanwhile, Buffett’s boost in Charter Communications shares puts gives him a 4.5% stake in the cable company. It’s worth noting that fellow billionaire John Malone indirectly owns 25% of Charter. 

Buffett doesn’t turn over his portfolio much. When he makes major changes, it’s worth paying attention.

Billionaire Bill Gates’ Bill & Melinda Gates Foundation Trust, which controls about a quarter of Gates’ net worth, continues to have faith in Buffett. During the third quarter, the trust upped its stake in Berkshire by 16%; over half of the trust’s $20 billion is now invested in Berkshire. 

The other big buzz from third-quarter 13F filings was the potential for a Yahoo! Inc. (NASDAQ: YHOO) and AOL, Inc. (NYSE: AOL) merger. Yesterday, my colleague Lawrence Meyers covered whether a Yahoo!-AOL merger will actually happen.

The buzz built to a fever pitch after notable activist investing firm Starboard Value took a new 2.4% stake in AOL during the third quarter. The hedge fund already owned shares of Yahoo! and has floated the idea of merging the two before. 

The actual dynamics would be a little more complicated than just merging two fledgling search engines. Starboard thinks Yahoo! should first spin off its Yahoo! Japan and Alibaba Group Holding Ltd. (NASDAQ: BABA) stakes. But recall that Starboard was previously an activist investor at AOL a couple years ago and sold its shares when it didn’t get its way. 

In any case, the Yahoo!-AOL discussion is a nice segue to another popular stock among hedge funds, Alibaba. Alibaba completed its record-setting IPO toward the end of Q3. The likes of George Soros, John Paulson, Leon Cooperman and Dan Loeb all appear to have profited from the Alibaba IPO.

Then there’s some of the less covered, but still noteworthy hedge-fund news that caught my attention.

David Tepper and his Appaloosa Management firm has been one of the best performing hedge funds over the last decade. As a result, he’s been the highest paid hedge fund manager for the last two years — pocketing $3.5 billion last year.

His largest stock holding is General Motors Company (NYSE: GM), and he’s been slowly adding to it. He increased his stake by 14.5% last quarter. Buffett also increased his stake in GM, by 21% – again, one of the few moves the world’s greatest investor made in Q3. 

Then there’s eBay (NASDAQ: EBAY), which announced that it plans to spin off its PayPal business next year. Larry Robbins of Glenview Capital also pitched eBay at the Invest For Kids Conference earlier this month.

Meanwhile, Dan Loeb of Third Point took a new position in eBay and Carl Icahn upped his stake by nearly 50%. Icahn’s hedge fund now owns 3.6% of eBay. He was pushing for eBay to spin off PayPal nearly six months before the company finally did it. 

Even one of the best value investors around, Seth Klarman, is buying eBay. His Baupost Group hedge fund increased its stake by 37% in Q3. Klarman is the author of Margin of Safety — a timeless investment book from 1991 that sells for around $2,000 on Amazon. 

I don’t advise blindly investing in stocks that hedge funds own. Consider this:  One of Buffett’s top holdings, IBM (NYSE: IBM), has fallen 15% in the last three months. 

Since Buffett first bought IBM stock in early 2011 shares are up just 7%, well below the 58% increase in the S&P 500 over that period.

Even the greatest get it wrong every now and then. But what investors can do is use 13Fs and hedge fund holdings as a starting point for finding great ideas worth doing more research on.  

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