10 Stocks Hedge Funds Ditched in Q3 Just Before the Market Crushed Them

Because of the massive amount of capital they manage (over $3 trillion), hedge funds’ collective buying and selling activity can have a significant effect on the direction of the overall market as well as that of individual stocks. Heading into the market turmoil of Q4, equity hedge funds’ exposure to the S&P 500 was at record highs, nearly touching 70% in early-October after steadily rising for months from less than 30% in early-2018. Check out the 30 Most Popular Stocks Among Hedge Funds for examples of some of the stocks they were crowded into.

That was bad news for investors when the market started stumbling in October, as hedge funds have been rapidly selling off stocks since then, dropping their exposure back down to 40% in the span of two months, which has contributed to the intensity of the market downturn. Based on historical precedent, the selling may not be over yet, as hedge funds have typically lowered their exposure to between 20-30% during tough market conditions, which could hold back a market rebound for a little longer.

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Even as hedge funds were still raising their exposure to equities in Q3, there were numerous stocks that they were selling off in droves. Of the following 10 stocks, all of which had net declines in hedge fund ownership of at least 20% during Q3, only one has posted positive gains in Q4 and just barely at that, as that stock is up by less than 1% since the end of September. While that isn’t totally surprising, as the market has been dreadful over the past three months, these 10 stocks have underperformed even that lowly benchmark, losing an average of 12.41% this quarter (the S&P 500 is down by 9.64%).

Lam Research Corporation (NASDAQ:LRCX) was being sold off by hedge funds even before the company’s CEO resigned due to allegations of misconduct. It was the second straight quarter of intense selling of the stock by hedge funds.

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Hedge fund ownership of TD Ameritrade Holding Corporation (NASDAQ:AMTD) hit a two-year low at the end of Q3 after 36% of the stock’s former shareholders bailed on it during the quarter. Among them was Peter Suess’ finance hedge fund Prana Capital Management, which unloaded all of its 300,123 AMTD shares.

Regions Financial Corporation (NYSE:RF) is another finance stock that also hit a two-year low in hedge fund ownership at the end of Q3. Clint Carlson’s Carlson Capital, one of the 140 Biggest and Most Famous Activist Hedge Funds, unloaded a $32.9 million stake in Regions Financial during the September quarter.

Hedge fund ownership of Western Digital Corporation (NASDAQ:WDC) peaked in early-2017 towards the tail end of the stock’s 12-month bull run and has fallen by 40% since then, including by 23% in Q3. WDC shares have given back all of the gains from that bull run to fall back near 5-year lows.

Service Corporation International (NYSE:SCI) suffered the deepest decline in hedge fund ownership among the stocks on this list, as 40% of its former shareholders sold it off in Q3. Dmitry Balyasny’s Balyasny Asset Management dumped the largest position owned by those former shareholders, counting 527,326 shares. SCI is the only stock on this list which is in the green so far in Q4.

Lightly-traded Teleflex Incorporated (NYSE:TFX) has been extremely volatile in 2018, which likely coincides with a lot of hedge fund activity in the stock, especially during Q3. Shares had lost 40% at one point during the quarter, which may have been around the time numerous funds, including Christopher James’ Partner Fund Management, sold off the stock.

Ctrip.com International, Ltd. (NASDAQ:CTRP) crashed to a 3-year low in hedge fund ownership at the end of Q3, after experiencing a brief resurgence in ownership during Q2. There has been net selling of Ctrip among hedge funds during 7 of the past 8 quarters, with over 60% of the stock’s former shareholders selling it off during that time.

Large positions in Marriott International, Inc. (NASDAQ:MAR), one of the 10 Most Profitable Hotels in The World, were unloaded by several prominent hedge funds in Q3, including Two Sigma Advisors, Laurion Capital Management, and Scopus Asset Management.

Hedge funds fled Zillow Group, Inc. (NASDAQ:Z) in droves during Q3, bailing on the stock which they had just bought in nearly equal numbers during Q2. Zillow shares have lost 35% of their value since the middle of 2018. On the other hand, insiders have been buying the stock very recently, which is another important signal investors should pay attention to (and which we also monitor and report on).

While Deere & Company (NYSE:DE) suffered a huge decline in the number of hedge fund shareholders during Q3, there wasn’t much of an outflow in money, as several bulls added to their positions in Q3, including Dan Loeb’s Third Point and David Blood and Al Gore’s Generation Investment Management.

Disclosure: None