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% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% 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 Western Digital Corporation (NASDAQ:WDC).
Is Western Digital Corporation (NASDAQ:WDC) the right pick for your portfolio? Investors who are in the know are becoming hopeful. The number of long hedge fund bets inched up by 10 recently. Our calculations also showed that WDC 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).
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.
Ken Griffin of Citadel Investment Group
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 new hedge fund action regarding Western Digital Corporation (NASDAQ:WDC).
What have hedge funds been doing with Western Digital Corporation (NASDAQ:WDC)?
Heading into the fourth quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 40% from one quarter earlier. By comparison, 33 hedge funds held shares or bullish call options in WDC a year ago. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Among these funds, Lyrical Asset Management held the most valuable stake in Western Digital Corporation (NASDAQ:WDC), which was worth $255.1 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $172.9 million worth of shares. Iridian Asset Management, Renaissance Technologies, and Partner Fund 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 Lyrical Asset Management allocated the biggest weight to Western Digital Corporation (NASDAQ:WDC), around 3.84% of its 13F portfolio. Tegean Capital Management is also relatively very bullish on the stock, designating 3.55 percent of its 13F equity portfolio to WDC.
Consequently, specific money managers have jumped into Western Digital Corporation (NASDAQ:WDC) headfirst. Partner Fund Management, managed by Christopher James, created the most valuable position in Western Digital Corporation (NASDAQ:WDC). Partner Fund Management had $47.5 million invested in the company at the end of the quarter. Larry Chen and Terry Zhang’s Tairen Capital also made a $18.4 million investment in the stock during the quarter. The other funds with brand new WDC positions are Israel Englander’s Millennium Management, Steve Cohen’s Point72 Asset Management, and Israel Englander’s Millennium Management.
Let’s now review hedge fund activity in other stocks similar to Western Digital Corporation (NASDAQ:WDC). We will take a look at New Oriental Education & Tech Group Inc. (NYSE:EDU), HCP, Inc. (NYSE:HCP), Alexandria Real Estate Equities Inc (NYSE:ARE), and STMicroelectronics N.V. (NYSE:STM). This group of stocks’ market valuations are similar to WDC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EDU | 35 | 1511145 | 3 |
| HCP | 25 | 562264 | -1 |
| ARE | 21 | 343145 | -6 |
| STM | 11 | 94533 | -2 |
| Average | 23 | 627772 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $628 million. That figure was $905 million in WDC’s case. New Oriental Education & Tech Group Inc. (NYSE:EDU) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 11 bullish hedge fund positions. Western Digital Corporation (NASDAQ:WDC) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on WDC as the stock returned 75% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.
