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 Omnicom Group Inc. (NYSE:OMC).
Omnicom Group Inc. (NYSE:OMC) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. OMC was in 24 hedge funds’ portfolios at the end of September. There were 23 hedge funds in our database with OMC positions at the end of the previous quarter. Our calculations also showed that OMC 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.
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 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.
Richard S. Pzena of Pzena Investment 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. Let’s view the latest hedge fund action regarding Omnicom Group Inc. (NYSE:OMC).
What does smart money think about Omnicom Group Inc. (NYSE:OMC)?
At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in OMC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Richard S. Pzena’s Pzena Investment Management has the biggest position in Omnicom Group Inc. (NYSE:OMC), worth close to $204.2 million, amounting to 1.1% of its total 13F portfolio. On Pzena Investment Management’s heels is AQR Capital Management, managed by Cliff Asness, which holds a $67.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers that hold long positions consist of John W. Rogers’s Ariel Investments, John Overdeck and David Siegel’s Two Sigma Advisors and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Pzena Investment Management allocated the biggest weight to Omnicom Group Inc. (NYSE:OMC), around 1.11% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, designating 0.86 percent of its 13F equity portfolio to OMC.
Consequently, some big names were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in Omnicom Group Inc. (NYSE:OMC). Citadel Investment Group had $27.6 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $5.8 million position during the quarter. The other funds with new positions in the stock are David Costen Haley’s HBK Investments, Paul Marshall and Ian Wace’s Marshall Wace, and Donald Sussman’s Paloma Partners.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Omnicom Group Inc. (NYSE:OMC) but similarly valued. These stocks are Arch Capital Group Ltd. (NASDAQ:ACGL), Equifax Inc. (NYSE:EFX), DISH Network Corp. (NASDAQ:DISH), and HEICO Corporation (NYSE:HEI). This group of stocks’ market values resemble OMC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ACGL | 21 | 1306954 | -2 |
| EFX | 26 | 1728610 | -8 |
| DISH | 36 | 1531248 | 4 |
| HEI | 42 | 1148598 | 7 |
| Average | 31.25 | 1428853 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $1429 million. That figure was $479 million in OMC’s case. HEICO Corporation (NYSE:HEI) is the most popular stock in this table. On the other hand Arch Capital Group Ltd. (NASDAQ:ACGL) is the least popular one with only 21 bullish hedge fund positions. Omnicom Group Inc. (NYSE:OMC) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately OMC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); OMC investors were disappointed as the stock returned 1.5% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
