Arch Capital Group Ltd. (ACGL) Fell Out Of Favor With Hedge Funds

Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Arch Capital Group Ltd. (NASDAQ:ACGL).

Arch Capital Group Ltd. (NASDAQ:ACGL) has seen a decrease in support from the world’s most elite money managers recently. Arch Capital Group Ltd. (NASDAQ:ACGL) was in 22 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 41. Our calculations also showed that ACGL isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Noam Gottesman of GLG Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now we’re going to check out the key hedge fund action encompassing Arch Capital Group Ltd. (NASDAQ:ACGL).

Do Hedge Funds Think ACGL Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -35% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ACGL over the last 24 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in Arch Capital Group Ltd. (NASDAQ:ACGL) was held by FPR Partners, which reported holding $597.7 million worth of stock at the end of June. It was followed by Polar Capital with a $238.2 million position. Other investors bullish on the company included Iridian Asset Management, Echo Street Capital Management, and GLG Partners. In terms of the portfolio weights assigned to each position FPR Partners allocated the biggest weight to Arch Capital Group Ltd. (NASDAQ:ACGL), around 15.41% of its 13F portfolio. Steel Canyon Capital is also relatively very bullish on the stock, setting aside 9.34 percent of its 13F equity portfolio to ACGL.

Seeing as Arch Capital Group Ltd. (NASDAQ:ACGL) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few hedgies who sold off their full holdings in the second quarter. It’s worth mentioning that Steve Cohen’s Point72 Asset Management cut the biggest stake of the 750 funds tracked by Insider Monkey, totaling close to $41.5 million in stock, and Phill Gross and Robert Atchinson’s Adage Capital Management was right behind this move, as the fund cut about $12.5 million worth. These moves are interesting, as total hedge fund interest was cut by 12 funds in the second quarter.

Let’s go over hedge fund activity in other stocks similar to Arch Capital Group Ltd. (NASDAQ:ACGL). These stocks are Check Point Software Technologies Ltd. (NASDAQ:CHKP), Altice USA, Inc. (NYSE:ATUS), Natura &Co Holding S.A. (NYSE:NTCO), The Liberty SiriusXM Group (NASDAQ:LSXMA), XPO Logistics Inc (NYSE:XPO), NICE Ltd (NASDAQ:NICE), and Westinghouse Air Brake Technologies Corporation (NYSE:WAB). This group of stocks’ market values match ACGL’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.1 hedge funds with bullish positions and the average amount invested in these stocks was $1830 million. That figure was $1439 million in ACGL’s case. XPO Logistics Inc (NYSE:XPO) is the most popular stock in this table. On the other hand Natura &Co Holding S.A. (NYSE:NTCO) is the least popular one with only 5 bullish hedge fund positions. Arch Capital Group Ltd. (NASDAQ:ACGL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ACGL is 25.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. A small number of hedge funds were also right about betting on ACGL as the stock returned 11% since the end of the second quarter (through 10/22) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.