Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space.
Is Wayfair Inc (NYSE:W) worth your attention right now? Investors who are in the know are getting less bullish. The number of bullish hedge fund positions retreated by 2 recently. Our calculations also showed that W isn’t among the 30 most popular stocks among hedge funds.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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.
Let’s take a glance at the recent hedge fund action regarding Wayfair Inc (NYSE:W).
How have hedgies been trading Wayfair Inc (NYSE:W)?
At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in W over the last 14 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Spruce House Investment Management was the largest shareholder of Wayfair Inc (NYSE:W), with a stake worth $337.8 million reported as of the end of September. Trailing Spruce House Investment Management was Adage Capital Management, which amassed a stake valued at $263 million. D E Shaw, Renaissance Technologies, and Scopia Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Since Wayfair Inc (NYSE:W) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there were a few hedgies that slashed their full holdings by the end of the third quarter. Intriguingly, James Crichton’s Hitchwood Capital Management said goodbye to the biggest position of the “upper crust” of funds followed by Insider Monkey, worth an estimated $88.6 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dumped about $22.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let’s now review hedge fund activity in other stocks similar to Wayfair Inc (NYSE:W). We will take a look at LINE Corporation (NYSE:LN), Snap-on Incorporated (NYSE:SNA), American Financial Group (NYSE:AFG), and ANGI Homeservices Inc.(NASDAQ:ANGI). This group of stocks’ market caps are similar to W’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LN | 4 | 52978 | -1 |
| SNA | 25 | 471183 | 1 |
| AFG | 29 | 311642 | 5 |
| ANGI | 22 | 329599 | 3 |
| Average | 20 | 291351 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $291 million. That figure was $1440 million in W’s case. American Financial Group (NYSE:AFG) is the most popular stock in this table. On the other hand LINE Corporation (NYSE:LN) is the least popular one with only 4 bullish hedge fund positions. Wayfair Inc (NYSE:W) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on W as the stock returned 66.4% and outperformed the market as well. You can see the entire list of these shrewd hedge funds here.
Disclosure: None. This article was originally published at Insider Monkey.
