It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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 Intercontinental Exchange Inc (NYSE:ICE).
Intercontinental Exchange Inc (NYSE:ICE) has experienced an increase in hedge fund interest lately. ICE was in 43 hedge funds’ portfolios at the end of the third quarter of 2019. There were 35 hedge funds in our database with ICE positions at the end of the previous quarter. Our calculations also showed that ICE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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’ 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.
David E. Shaw of D.E. Shaw
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. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind we’re going to view the latest hedge fund action regarding Intercontinental Exchange Inc (NYSE:ICE).
What does smart money think about Intercontinental Exchange Inc (NYSE:ICE)?
Heading into the fourth quarter of 2019, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 23% from one quarter earlier. On the other hand, there were a total of 36 hedge funds with a bullish position in ICE a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Cantillon Capital Management was the largest shareholder of Intercontinental Exchange Inc (NYSE:ICE), with a stake worth $419.3 million reported as of the end of September. Trailing Cantillon Capital Management was GQG Partners, which amassed a stake valued at $312.7 million. Alkeon Capital Management, D E Shaw, and Iridian Asset Management 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 Prana Capital Management allocated the biggest weight to Intercontinental Exchange Inc (NYSE:ICE), around 6.91% of its 13F portfolio. Crescent Park Management is also relatively very bullish on the stock, earmarking 5.9 percent of its 13F equity portfolio to ICE.
As one would reasonably expect, some big names were breaking ground themselves. Echo Street Capital Management, managed by Greg Poole, initiated the largest position in Intercontinental Exchange Inc (NYSE:ICE). Echo Street Capital Management had $53.1 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $9.1 million position during the quarter. The other funds with brand new ICE positions are Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, Benjamin A. Smith’s Laurion Capital Management, and Jaime Sterne’s Skye Global Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Intercontinental Exchange Inc (NYSE:ICE) but similarly valued. These stocks are The Sherwin-Williams Company (NYSE:SHW), Marsh & McLennan Companies, Inc. (NYSE:MMC), Illinois Tool Works Inc. (NYSE:ITW), and Walgreens Boots Alliance Inc (NASDAQ:WBA). This group of stocks’ market valuations resemble ICE’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SHW | 45 | 1587764 | 5 |
| MMC | 26 | 579695 | -3 |
| ITW | 28 | 335340 | 0 |
| WBA | 34 | 831418 | -7 |
| Average | 33.25 | 833554 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $834 million. That figure was $2291 million in ICE’s case. The Sherwin-Williams Company (NYSE:SHW) is the most popular stock in this table. On the other hand Marsh & McLennan Companies, Inc. (NYSE:MMC) is the least popular one with only 26 bullish hedge fund positions. Intercontinental Exchange Inc (NYSE:ICE) 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately ICE wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ICE were disappointed as the stock returned 24.2% in 2019 (through December 23rd) 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 many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
