Dan Loeb's simple strategy: talented management teams, strong and growing free cash flows ...

Dan Loeb, the acerbic activist hedge fund manager, crushed the market over the last 20 years and he's doing it again this year.

Loeb's Third Point fund, which turned 20 this year, posted 21 percent annualized returns over that time span, compared with a 9 percent annualized return for the S&P 500, according to a letter sent to investors. It's up 4.9 percent this year.

Loeb calculates that they've generated $12 billion in trading profits for clients over the years.

"Of course, past performance is no guarantee of future results and it is unlikely we will duplicate these returns over the next 20 years. However, we believe we are well positioned to continue to earn our investors superior risk-adjusted returns," Loeb wrote in a note to clients Friday.

While he's known for forcing change in the companies he owns by aggressively targeting management with bristling open letters, he revealed last week another strategy he uses to top the market that's surprisingly simple.

"Over the past few years, we have found investment opportunities in several companies that share simple, common characteristics: talented management teams, strong and growing free cash flows, and a proven track record of smart capital allocation that drives significant increases of intrinsic value per share," said Loeb, who oversees more than $17 billion.

It's a strategy similar to the one deployed by Warren Buffett.

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