Hedge Funds Are Selling Arena Pharmaceuticals, Inc. (ARNA)

Here’s why Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) might be a sell.

Now, according to many market players, hedge funds are viewed as delayed, outdated financial tools of an era lost to time. Although there are In excess of 8,000 hedge funds trading today, Insider Monkey looks at the elite of this club, close to 525 funds. It is widely held that this group controls the lion’s share of the smart money’s total assets, and by tracking their highest performing equity investments, we’ve unearthed a few investment strategies that have historically outstripped Mr. Market. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points per annum for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have beaten the S&P 500 index by 33 percentage points in 11 months (find the details here).

Equally as crucial, optimistic insider trading sentiment is another way to look at the stock market universe. Obviously, there are plenty of reasons for a corporate insider to cut shares of his or her company, but only one, very clear reason why they would buy. Several academic studies have demonstrated the valuable potential of this strategy if investors know what to do (learn more here).

Keeping this in mind, it’s important to discuss the newest info surrounding Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

How are hedge funds trading Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)?

At the end of the second quarter, a total of 11 of the hedge funds we track were bullish in this stock, a change of -15% from the previous quarter. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were upping their holdings significantly.

When using filings from the hedgies we track, Deerfield Management, managed by James E. Flynn, holds the most valuable position in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). Deerfield Management has a $19.8 million position in the stock, comprising 0.9% of its 13F portfolio. Sitting at the No. 2 spot is Samlyn Capital, managed by Robert Pohly, which held a $12.7 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other hedgies with similar optimism include Ken Griffin’s Citadel Investment Group, and Cliff Asness’s AQR Capital Management.

Because Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has witnessed declining interest from the top-tier hedge fund industry, it’s easy to see that there exists a select few money managers that decided to sell off their entire stakes last quarter. At the top of the heap, Daniel Gold’s QVT Financial dumped the largest stake of the “upper crust” of funds we monitor, valued at close to $6.8 million in stock, and D. E. Shaw of D E Shaw was right behind this move, as the fund said goodbye to about $2.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds last quarter.

What do corporate executives and insiders think about Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)?

Bullish insider trading is most useful when the company in question has experienced transactions within the past six months. Over the latest half-year time frame, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has experienced zero unique insiders buying, and 2 insider sales (see the details of insider trades here).

We’ll go over the relationship between both of these indicators in other stocks similar to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). These stocks are Charles River Laboratories (NYSE:CRL), Synageva BioPharma Corp (NASDAQ:GEVA), Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY), Viropharma Inc (NASDAQ:VPHM), and Questcor Pharmaceuticals Inc (NASDAQ:QCOR). This group of stocks are the members of the biotechnology industry and their market caps are closest to ARNA’s market cap.

Using the returns shown by the previously mentioned analyses, average investors must always watch hedge fund and insider trading sentiment, and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) applies perfectly to this mantra.

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