To The Moon

I think many “Follow The Smart Money” strategy investors would look at each quarter's 13F reporting period. What actually this strategy does?

This strategy revolves around tracking the moves of institutional investors, market insiders, and other seasoned professionals who are considered to possess superior insights into market dynamics.

Understanding the Smart Money

The term "Smart Money" refers to institutional investors, hedge funds, and other sophisticated market participants who are often viewed as having a deep understanding of the markets. These entities manage significant amounts of capital and are believed to possess superior research capabilities, allowing them to make well-informed investment decisions.

In this article I would be share the list of Top 10 LONG positions that hedge funds are holding in Q3 2023.

Top 10 LONG positions by Hedge Fund in Q3 2023

As you can see the top 3 positions are $Microsoft(MSFT)$ $Amazon.com(AMZN)$ $Apple(AAPL)$ . They are members of the Magnificent Seven.

If hedge fund is flowing into these 3 stocks, it may be an indication of strong future performance. We will look at them closely on their performance in Q3 2023.

Hedge funds, known for their flexibility and sophisticated investment strategies, often reveal their holdings and strategies in various reports. Analyzing these data can provide insights into the thinking of some of the brightest minds in finance.

Magnificent 7 Performance in H1 2023 vs Q3 2023

In Q3 2023 (July to September), the S&P 500 fell by 3.8%, but if we take out the magnificent 7 stocks, it was down slightly less than 3.6%.

This narrow gap was pretty much opposite of how the outperformance by the magnificent 7 did in the first size months of 2023.

By the end of September, S&P 500 overall increased by about 12.1% in 2023 but it gained less than 1.8% after removing the “Magnificent 7” stocks.

The reason why these 7 magnificent stocks have a good performance in the 1st half of 2023 could be due to they have gotten too large. The S&P 500 Equal Weight Index, which assigns each member of the S&P 500 the same influence on the overall index, has consistently underperformed since March.

The equal weight index is up less than 0.4% since the start of the year, compared to the overall index's 12.1% increase.

If we look at the Top 3 stocks position by hedge funds, we can noticed that their first half performance as compared to the rest, seems to sit in the middle. The negative performance of these 3 stocks might be due to bears doing heavy selling.

This could have pose a good opportunity for the hedge funds to buy these stocks at lower price. I think we need to also understand how these 3 stocks correlation sits with the S&P 500.

Correlation With S&P 500

If we were to compare the correlation between these 3 stocks and S&P 500, Apple seem to have the closest relationship with S&P 500 as its score is close to 1.0, Amazon and Microsoft might not have such close relationship, but we can see that it is increasing.

This might be a good thing as S&P 500 should be moving upside as inflation have showed signs of cooling. Market is even anticipating whether there will be cuts next year.

Summary

If we were to be able to identify trends early and align our strategy with the smart money, this could allows us to position ahead of market movements.

This can be particularly advantageous in capturing opportunities before they become widely recognized. This is especially true if we were to follow the smart money and load these 3 stocks, we could be seeing some handsome gains.

But we need to be mindful that while the Follow the Smart Money strategy can be a valuable tool for investors, it is important that we approach it with a critical mindset.

Markets are inherently unpredictable, and blindly mimicking the actions of institutional investors is not a foolproof strategy. Always look out for any surprise news and events.

But there is still benefit in helping us to get well-rounded investment approach by incorporating insights from the smart money.

What I have just shared is just some ways or parts we can deciphering the smart money strategy, there are lots more that can be used, I will share it when time permits.

Appreciate if you could share your thoughts in the comment section whether you think deciphering the smart money strategy would help us to identify trends ahead of our peers.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.