Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Verso Corporation (NYSE:VRS).
Verso Corporation (NYSE:VRS) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 22 hedge funds’ portfolios at the end of September. 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 U.S. Lime & Minerals Inc. (NASDAQ:USLM), Evolus, Inc. (NASDAQ:EOLS), and Jernigan Capital Inc (NYSE:JCAP) to gather more data points. Our calculations also showed that VRS 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Howard Marks of Oaktree Capital Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the fresh hedge fund action encompassing Verso Corporation (NYSE:VRS).
How are hedge funds trading Verso Corporation (NYSE:VRS)?
Heading into the fourth quarter of 2019, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in VRS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, SCW Capital Management held the most valuable stake in Verso Corporation (NYSE:VRS), which was worth $23 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $22.9 million worth of shares. Oaktree Capital Management, Redwood Capital Management, and Skylands Capital 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 SCW Capital Management allocated the biggest weight to Verso Corporation (NYSE:VRS), around 19.77% of its 13F portfolio. Solas Capital Management is also relatively very bullish on the stock, designating 7.94 percent of its 13F equity portfolio to VRS.
Since Verso Corporation (NYSE:VRS) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few money managers that elected to cut their full holdings last quarter. Intriguingly, Israel Englander’s Millennium Management cut the biggest position of all the hedgies watched by Insider Monkey, worth about $1.7 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace was right behind this move, as the fund cut about $0.7 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to Verso Corporation (NYSE:VRS). We will take a look at U.S. Lime & Minerals Inc. (NASDAQ:USLM), Evolus, Inc. (NASDAQ:EOLS), Jernigan Capital Inc (NYSE:JCAP), and Luxfer Holdings PLC (NYSE:LXFR). This group of stocks’ market caps resemble VRS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| USLM | 3 | 29576 | -1 |
| EOLS | 7 | 12894 | -5 |
| JCAP | 13 | 43400 | -2 |
| LXFR | 11 | 67175 | 2 |
| Average | 8.5 | 38261 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $118 million in VRS’s case. Jernigan Capital Inc (NYSE:JCAP) is the most popular stock in this table. On the other hand U.S. Lime & Minerals Inc. (NASDAQ:USLM) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Verso Corporation (NYSE:VRS) is more popular among hedge funds. 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. Hedge funds were also right about betting on VRS as the stock returned 49.1% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
