Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Associated Capital Group, Inc. (NYSE:AC).
Hedge fund interest in Associated Capital Group, Inc. (NYSE:AC) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Central Securities Corporation (NYSE:CET), Codexis, Inc. (NASDAQ:CDXS), and Preferred Bank (NASDAQ:PFBC) to gather more data points. Our calculations also showed that AC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. In December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Now, let’s take a detailed look at how hedge funds were trading Associated Capital.
Hedge fund activity in Associated Capital Group, Inc. (NYSE:AC)
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AC over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exist a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
The largest stake in Associated Capital Group, Inc. (NYSE:AC) was held by Horizon Asset Management, which reported holding $52.6 million worth of stock at the end of September. It was followed by Royce & Associates with a $6.9 million position. Other investors bullish on the company included GAMCO Investors, Renaissance Technologies, and Ancora Advisors. In terms of the portfolio weights assigned to each position Horizon Asset Management allocated the biggest weight to Associated Capital Group, Inc. (NYSE:AC), around 1.58% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.06 percent of its 13F equity portfolio to AC.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now take a look at hedge fund activity in other stocks similar to Associated Capital Group, Inc. (NYSE:AC). These stocks are Central Securities Corporation (NYSE:CET), Codexis, Inc. (NASDAQ:CDXS), Preferred Bank (NASDAQ:PFBC), and Seabridge Gold, Inc. (NYSE:SA). All of these stocks’ market caps match AC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CET | 1 | 11460 | -1 |
| CDXS | 8 | 207419 | -4 |
| PFBC | 10 | 37669 | -2 |
| SA | 6 | 39255 | -3 |
| Average | 6.25 | 73951 | -2.5 |
View the table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $74 million. That figure was $64 million in AC’s case. Preferred Bank (NASDAQ:PFBC) is the most popular stock in this table. On the other hand, Central Securities Corporation (NYSE:CET) is the least popular one with only 1 bullish hedge fund positions. Associated Capital Group, Inc. (NYSE:AC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately, AC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AC investors were disappointed as the stock returned 1.4% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large-cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
