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 in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. 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 Office Depot Inc (NASDAQ:ODP).
Is Office Depot Inc (NASDAQ:ODP) the right pick for your portfolio? Money managers are selling. The number of long hedge fund positions were cut by 4 in recent months. Our calculations also showed that ODP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ODP was in 16 hedge funds’ portfolios at the end of September. There were 20 hedge funds in our database with ODP holdings at the end of the previous quarter.
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.
Joshua Friedman of Canyon Capital Advisors
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the recent hedge fund action regarding Office Depot Inc (NASDAQ:ODP).
Hedge fund activity in Office Depot Inc (NASDAQ:ODP)
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in ODP a year ago. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Canyon Capital Advisors held the most valuable stake in Office Depot Inc (NASDAQ:ODP), which was worth $39.2 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $6.7 million worth of shares. AQR Capital Management, Arrowstreet Capital, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Canyon Capital Advisors allocated the biggest weight to Office Depot Inc (NASDAQ:ODP), around 0.85% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to ODP.
Judging by the fact that Office Depot Inc (NASDAQ:ODP) has witnessed a decline in interest from hedge fund managers, we can see that there exists a select few hedgies that slashed their entire stakes by the end of the third quarter. At the top of the heap, Philippe Laffont’s Coatue Management dumped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, totaling close to $1.3 million in stock, and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital was right behind this move, as the fund dropped about $0.7 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks similar to Office Depot Inc (NASDAQ:ODP). We will take a look at TiVo Corporation (NASDAQ:TIVO), CareDx, Inc. (NASDAQ:CDNA), Turquoise Hill Resources Ltd (NYSE:TRQ), and Big Lots, Inc. (NYSE:BIG). This group of stocks’ market valuations resemble ODP’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TIVO | 21 | 95965 | 2 |
| CDNA | 22 | 104501 | -2 |
| TRQ | 19 | 207845 | -1 |
| BIG | 21 | 82166 | 1 |
| Average | 20.75 | 122619 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $123 million. That figure was $62 million in ODP’s case. CareDx, Inc. (NASDAQ:CDNA) is the most popular stock in this table. On the other hand Turquoise Hill Resources Ltd (NYSE:TRQ) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Office Depot Inc (NASDAQ:ODP) is even less popular than TRQ. Hedge funds clearly dropped the ball on ODP as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on ODP as the stock returned 28.1% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
