As I’ve written about previously, small hedge funds tend to outperform large hedge funds. The famous managers typically gained their reputations when their funds were small and they were more aggressive. But as a fund’s managed assets swell, it’s forced to focus on more liquid, less profitable stocks. The manager also tends to be more intent on raising capital than aggressively pursuing capital gains. Below are rising star hedge funds that are small, but have shown exceptional performance. They may not be small for long.
Here is a list of 10 hedge funds whose stock picks have consistently outperformed , yet their funds still have long holdings of less than $1B.
| Quarter | Fund | City | # Holdings | 13F MV | Turnover | % in top 10 | QoQ Perf Eq Wt | 1 Yr Perf Ann | 3 Yr Perf Ann | Earliest 13F |
| Q3 2020 | DORSEY ASSET MANAGEMENT | CHICAGO | 11 | 673,027,000 | 9.09% | 98.41% | 22.94% | 59.53% | 31.92% | 12/30/16 |
| Q3 2020 | VALLEY FORGE CAPITAL MANAGEMENT | WAYNE | 10 | 921,599,000 | 100.00% | 2.43% | 25.78% | 25.13% | 12/30/16 | |
| Q3 2020 | CROSSLINK CAPITAL INC | MENLO PARK | 25 | 468,801,000 | 69.96% | 17.52% | 47.73% | 30.27% | 3/30/01 | |
| Q3 2020 | NIGHT OWL CAPITAL MANAGEMENT | GREENWICH | 31 | 480,354,000 | 9.68% | 62.99% | 4.81% | 49.63% | 30.73% | 12/30/07 |
| Q3 2020 | KAYAK INVESTMENT PARTNERS | SAN FRANCISCO | 30 | 732,095,000 | 40.00% | 63.23% | 12.02% | 75.36% | 31.02% | 12/30/16 |
| Q3 2020 | OAKMONT CORP | LOS ANGELES | 27 | 963,878,000 | 18.52% | 90.51% | 11.36% | 36.01% | 18.05% | 3/30/01 |
| Q3 2020 | CYPRESS FUNDS LLC | LOS ANGELES | 16 | 935,699,000 | 6.25% | 71.76% | 11.22% | 57.52% | 25.56% | 3/30/01 |
| Q3 2020 | FIRST LIGHT ASSET MANAGEMENT | EDINA | 60 | 975,979,000 | 30.00% | 57.90% | 12.99% | 52.35% | 33.05% | 12/30/13 |
| Q3 2020 | ANCIENT ART, L.P. | AUSTIN | 20 | 728,973,000 | 35.00% | 86.84% | 26.62% | 41.34% | 22.31% | 12/30/07 |
| Q3 2020 | GREENBRIER PARTNERS CAPITAL | DALLAS | 15 | 842,594,000 | 91.92% | 7.69% | 24.14% | 17.40% | 12/30/11 |
Heading this list of little funds with big performance is Dorsey Asset Management, LLC. The Chicago-based firm is run by Pat Dorsey, who has gained notoriety for his emphasis on “moats” in his value investing approach. He’s the author of two books: The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth. In a previous article, I discussed that Dorsey has identified four types of moats — competitive business advantages — that he uses to inform his stock picking.
Intangible Assets
Switching Costs
Network Effects
Cost Advantages
Pat Dorsey uses “moats” as a framework to analyze a company’s competitive advantage.
One might be inclined to dismiss the moat idea as simplistic. But Dorsey’s track record suggests otherwise. The annualized three-year performance of Dorsey’s 13F filings (top 10 long portfolio holdings, equal-weight, rebalanced quarterly) was 31.92% through Q3’s end. (Q4 13F filings will be reported on Feb. 15.) One year performance through Q3 was 59.53%. These returns lead the hedge fund pack, not just for small funds, but for all funds. WhaleWisdom gives Dorsey Asset Management a WhaleScore of 100 — as good as it gets.
Yet Dorsey’s hedge fund has AUM of only $688M, the great majority of which is reported in 13F filings. (Suggesting the hedge fund does minimal hedging.) Dorsey runs a very concentrated portfolio, consisting of just 11 stocks at Q3’s end.
| Shares Held | 13F Mkt Value | % Portfolio | Rank | % Chg | Qtr 1st Owned | Est Avg Price Paid | Recent Price | Source Date | ||
| FB | 606,612 | $158,872,000 | 23.61 | 1 | -5% | Q4 2016 | 152.9 | 273.16 | 9/30/20 | 11/13/20 |
| WIX | 410,415 | $104,594,000 | 15.54 | 2 | 29% | Q3 2018 | 142.11 | 249.96 | 9/30/20 | 11/13/20 |
| GOOG | 46,947 | $68,993,000 | 10.25 | 3 | 2% | Q1 2017 | 1,122.53 | 1,751.88 | 9/30/20 | 11/13/20 |
| UPWK | 3,950,351 | $68,894,000 | 10.24 | 4 | 4% | Q2 2020 | 14.56 | 34.52 | 9/30/20 | 11/13/20 |
| ROKU | 303,373 | $57,277,000 | 8.51 | 5 | -11% | Q4 2019 | 121.71 | 332.02 | 9/30/20 | 11/13/20 |
| PYPL | 254,341 | $50,113,000 | 7.45 | 6 | 2% | Q2 2018 | 92.46 | 234.2 | 9/30/20 | 11/13/20 |
| EBAY | 871,076 | $45,383,000 | 6.74 | 7 | New | Q3 2020 | 52.1 | 50.25 | 9/30/20 | 11/13/20 |
| SMAR | 889,987 | $43,983,000 | 6.54 | 8 | -45% | Q2 2020 | 50.92 | 69.29 | 9/30/20 | 11/13/20 |
| AVLR | 293,390 | $37,360,000 | 5.55 | 9 | 2% | Q2 2019 | 73.61 | 164.89 | 9/30/20 | 11/13/20 |
| DESP | 4,223,698 | $26,863,000 | 3.99 | 10 | -8% | Q1 2019 | 12.54 | 12.81 | 9/30/20 | 11/13/20 |
| AYX | 94,189 | $10,695,000 | 1.59 | 11 | -55% | Q3 2019 | 103.38 | 121.79 | 9/30/20 | 11/13/20 |
Valley Forge Capital Management has generated great returns since 2016, but has only $920M in 13F securities.
Another small fund with a concentrated portfolio and very impressive performance is Valley Forge Capital Management. I’d wager there aren’t any other hedge funds based in Wayne, Indiana. Valley Forge’s founder and Portfolio Manager is Dev Kantesaria. According to the firm’s ADV part 2.
The investment objective of the Fund is to outperform the S&P 500 Index over a multi-year timeframe through the selection of companies that the Firm believes are trading at a large discount (in the case of long equity positions) or premiums (in the case of short equity positions) to their intrinsic value.
Since 2017, when Valley Forge first filed a 13F, Kantesaria has achieved this goal — and then some. Valley Forge’s three year annual performance was 25.13% through Q3. Since 2017, an equal-weight portfolio of the fund’s top 10 long holdings has averaged a 29.46% return. The fund’s largest holding was S&P Global inc. (SPGI), representing 24.81% of the fund’s 13F portfolio as of the quarter’s end.
Despite the great returns, the fund had just $921M in 13F securities in Q3.
Edina, MN-based First Light Asset Management is a rising star hedge fund in the world of health care investing. The hedge fund was founded in 2013 by Matt Arens, who is also the firm’s CEO and Senior Portfolio Manager.
First Light Asset Management is a rising star hedge fund in the health care sector.
Arens runs a diversified portfolio consisting of 60 stocks as of Q3’s close. Although, 57.90% of the portfolio was invested in its top 10 holdings. The #1 position was Immunomedics Inc. (IMMU), accounting for 13.75% of the fund’s long portfolio at quarter’s end.
In the fund’s ADV part 2, the First Light references margin of safety as a key investment consideration.
Risk Management
A key tenet of [the fund’s] investment process is assessing the margin of safety in prospective investments, and therefore risk management starts at the position level. First Light views risk as potential for permanent impairment of capital and not the volatility of a security. First Light seeks to manage risk through fundamental analysis and disciplined portfolio construction, and in general will re-allocate capital to what it believes are the best risk/reward scenarios. [The fund] believes its probability weighted approach to stock selection also adequately accounts for individual stock risks and therefore position weightings reflect this implied risk.
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