Back in May, I wrote about the 13D Activist fund (ticker: DDDIX), which buys stocks that are popular among activist hedge funds like Nelson Petlz and Bill Ackman (click here for my article).

Although I did say that it wasn’t a great fund for Acropolis, I thought it was interesting because it had actually delivered alpha – returns that couldn’t be explained by factors like value, momentum, size and quality.

Since my article, the fund has probably lost that alpha because the fund has declined by -10 percent while the S&P 500 was basically even.

One of the main reasons for the decline is that one of the top holdings was Valeant Pharmaceuticals, which is down substantially as that crowded trade unwound (click here for my article).  Prior to the selloff in Valeant, it was more than seven percent of the fund.

The 13D Activist fund explicitly buys and sells stocks because other investors are, which has yielded great results until this year (it is among the four percent of actively managed funds that outperformed the market in 2012, 2013 and 2014).

We happen to think that a seven percent weight is far too much for any single stock and prefer a much more diversified portfolio.

Other managers are willing to be far more concentrated.  Take the Sequoia fund (ticker: SEQUX), which is famous in part because when Warren Buffet closed his investment partnership in the early 1970s, he recommended that his clients invest with Sequoia.

They have a terrific long-run track record (which is mostly explained by their value orientation) and rating companies like Morningstar routinely heap praise on them.

That has come to a screeching halt this year because they invested more than a third of the fund in Valeant and have apparently been adding to the stock as it has sold off (as you might expect from a value investor).

The fund is down eight percent this year, but more surprisingly, two of their five independent directors abruptly resigned, ostensibly because they were unhappy about how the fund is being managed.

Fumbling on concentrated bets isn’t new – I profiled a massive bet by the Fairholme fund (ticker: FAIRX) on AIG that cost them a -32.42 percent drop in 2011.

The 13D Activist and Sequoia fund performance is just another story of how big bets can come back and bite you.  I’m reminded of an old market saying that we really like, ‘diversification is the only free lunch, so enjoy a large portion.’