5 Most-Popular Stocks for Billionaires

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Insider Monkey) -- If you've been reading articles about hedge fund performance over the past three years, you're probably thinking index funds are better options for investors. During the last quarter, an average hedge fund underperformed S&P 500 index ETFs by around 8 percentage points.

This is a bit misleading though. Actually, equity hedge funds hedge around 50% of their exposure. It isn't really appropriate to compare hedge fund returns to broad market indices that are 100% long at all times.

Hedge funds have been able to outperform the market significantly over the past five years. Unfortunately, hedge fund managers took around 47% of their total returns as fees (read the details here). Despite the huge hedge fund fees, investors were still able to outperform the market by 2.5 percentage points per year.

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We like hedge funds. We believe hedge fund managers are talented and that they deserve billions of dollars in fees. However, we don't think it's a smart move to directly hand over your hard earned dollars to hedge fund managers. This will only help them to become billionaires before you can even think about retirement.

A better alternative is to imitate billionaire fund managers' top stock picks. Insider Monkey constructed the Billionaire Hedge Fund Index last month and reported that this index was beating the market by 4.4 percentage points through the middle of March. Billionaire Hedge Fund Index continued its spectacular performance over the past three weeks. As of April 9^th the index is up 17% vs. 10.6% for the S&P 500 ETF. Billionaire fund managers' top stock picks beat the market by 6.4 percentage points since the beginning of this year. Here are the top 5 stock picks:

1. Apple is the most popular stock among billionaire fund managers. Almost half of them had a large position in Apple at the end of December. Apple is also the most popular stock among other hedge fund managers (see the 10 most popular stocks). The stock gained 57% this year as of April 9. Apple has been an obvious value play for a very long time. At the beginning of last year the market valued the stock as if it was a low growth utility stock. By the end of the summer, low growth utility stocks had even higher multiples than technology stocks like Apple and Microsoft . Investing in Apple was really a no brainer. It is still very attractively priced. Billionaires Ken Griffin, David Einhorn, and Stephen Mandel are extremely bullish about the stock.

2. Google is the second most popular stock among billionaire hedge fund managers. The stock lost 2.3% as of April 9. We are optimistic about Google as well. The stock's 2013 forward P/E ratio is less than 13. It is slightly more expensive than Apple but the stock is the undisputed leader of the search business. It is expected to increase its earnings by nearly 20% per year over the next few years. We expect that Google will outperform the market over the next five years. David E. Shaw, Chase Coleman, and Ken Fisher have large positions in Google.

3. El Paso is the third most-popular stock among billionaire hedge fund managers. Carl Icahn hit the jackpot by investing more than a $1 billion before its merger with Kinder Morgan was announced. He had $1.9 billion in the stock at the end of December. This is a merger arbitrage play that returned 13.9% since the beginning of this year.

4. News Corp. is the fourth most-popular stock among billionaire hedge fund managers. This is a conservative long-term play. The stock was a real bargain last summer. Billionaire fund managers were greedy when others were fearful. News Corp underperformed the market this year, returning 7.2% through April 9^th. Steven Cohen and John Paulson are among News Corp investors (see John Paulson's stock picks).

5. Medco Health Solutions is the fifth most-popular stock. This is also a merger arbitrage play. The stock returned more than 25% this year until its merger with Express Scripts closed in early April.

As you can see hedge funds' top five stock picks performed even better than the rest of their stock picks. These five stocks had an average return of more than 20%. Our billionaire hedge fund managers became billionaires because of their stock picks. Their recent performance shows that they still have their magic touch.