Hedge Funds Underperform in 2011: Will 2012 Be Different?

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Think hedge funds are equipped with superior investing skills? According to recent data by Morningstar, that's far from the truth. Last year, 79% of large-cap fund managers underperformed the Standard & Poor's 500 index. That's the worst showing since 1997.

Here's why: "Annual expenses -- averaging 1.3% of assets for actively managed big-stock funds, vs. 0.69% for index funds -- hampered returns. Plus, besting the S&P is harder in years like 2011, when the biggest stocks in the index outperform the smaller ones managers tend to load up on."

The results hold true across and within most market sectors.

This information is not only disconcerting for the value investors place on institutional sentiment, it also brings skepticism to actively managed exchange-traded funds, like Pimco's new Total Return ETF (TRXT).

Business section: Investing ideas
It has been a long time since hedge fund managers have underperformed the S&P 500 index, and so far 2012 is looking much more promising.

To find large-cap stocks that seem likely to cash in value over the year we created a universe of stocks with market caps above $10 billion and with five-year projected EPS growth above 20%.

We then screened for positive institutional sentiment: net institutional purchases in the current quarter.

Do you think hedge funds will make better calls in 2012? Will these names help to achieve that goal? (Click here to access free, interactive tools to analyze these ideas.)

1. Companhia Brasileira de Distribuicao (NYS: CBD) : Operates as a retailer of food products, clothing, home appliances, and other products through its chain of hypermarkets, supermarkets, specialized and department stores, convenience stores, and the Internet in Brazil. EPS growth over the next five years at 30.47%. Net institutional purchases in the current quarter at 9.0M shares, which represents about 9.62% of the company's float of 93.56M shares

2. salesforce.com (NYS: CRM) : Provides customer and collaboration relationship management (CRM) services to various businesses and industries worldwide. EPS growth over the next five years at 27.73%. Net institutional purchases in the current quarter at 6.5M shares, which represents about 5.2% of the company's float of 125.09M shares

3. lululemon athletica (NAS: LULU) : Engages in the design, manufacture, and distribution of athletic apparel and accessories for women, men, and female youth primarily in Canada, the United States, and Australia. EPS growth over the next five years at 29.02%. Net institutional purchases in the current quarter at 6.0M shares, which represents about 6.06% of the company's float of 99.02M shares

4. Regeneron Pharmaceuticals (NAS: REGN) : Develops, and commercializes pharmaceutical products for the treatment of serious medical conditions in the United States. EPS growth over the next five years at 25%. Net institutional purchases in the current quarter at 2.9M shares, which represents about 4.06% of the company's float of 71.38M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity, all other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica and Salesforce.com. Motley Fool newsletter services have recommended shorting Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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