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 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% 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 Dunkin Brands Group Inc (NASDAQ:DNKN).
Dunkin Brands Group Inc (NASDAQ:DNKN) investors should pay attention to an increase in hedge fund interest in recent months. Our calculations also showed that DNKN 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).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Bruce Kovner of Caxton Associates LP
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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. With all of this in mind let’s view the key hedge fund action encompassing Dunkin Brands Group Inc (NASDAQ:DNKN).
How have hedgies been trading Dunkin Brands Group Inc (NASDAQ:DNKN)?
At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in DNKN a year ago. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, Marshall Wace held the most valuable stake in Dunkin Brands Group Inc (NASDAQ:DNKN), which was worth $53.8 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $51.9 million worth of shares. Renaissance Technologies, Balyasny Asset Management, and Citadel Investment Group 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 Marshall Wace allocated the biggest weight to Dunkin Brands Group Inc (NASDAQ:DNKN), around 0.42% of its 13F portfolio. Noked Capital is also relatively very bullish on the stock, setting aside 0.36 percent of its 13F equity portfolio to DNKN.
As one would reasonably expect, key hedge funds were leading the bulls’ herd. Renaissance Technologies, founded by Jim Simons, established the most outsized position in Dunkin Brands Group Inc (NASDAQ:DNKN). Renaissance Technologies had $19.8 million invested in the company at the end of the quarter. Joel Greenblatt’s Gotham Asset Management also initiated a $1.3 million position during the quarter. The other funds with brand new DNKN positions are Robert Pohly’s Samlyn Capital, Donald Sussman’s Paloma Partners, and Bruce Kovner’s Caxton Associates.
Let’s now take a look at hedge fund activity in other stocks similar to Dunkin Brands Group Inc (NASDAQ:DNKN). These stocks are GCI Liberty, Inc. (NASDAQ:GLIBA), Columbia Sportswear Company (NASDAQ:COLM), Alliance Data Systems Corporation (NYSE:ADS), and Robert Half International Inc. (NYSE:RHI). All of these stocks’ market caps are similar to DNKN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GLIBA | 34 | 2003406 | -4 |
| COLM | 26 | 155276 | -1 |
| ADS | 35 | 1242255 | 1 |
| RHI | 21 | 577040 | -5 |
| Average | 29 | 994494 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $994 million. That figure was $194 million in DNKN’s case. Alliance Data Systems Corporation (NYSE:ADS) is the most popular stock in this table. On the other hand Robert Half International Inc. (NYSE:RHI) is the least popular one with only 21 bullish hedge fund positions. Dunkin Brands Group Inc (NASDAQ:DNKN) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately DNKN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DNKN investors were disappointed as the stock returned 20.2% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019.
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.
