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 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% 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 Liberty Latin America Ltd. (NASDAQ:LILA).
Is Liberty Latin America Ltd. (NASDAQ:LILA) a healthy stock for your portfolio? Hedge funds are buying. The number of long hedge fund bets inched up by 2 lately. Our calculations also showed that LILA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). LILA was in 13 hedge funds’ portfolios at the end of the third quarter of 2019. There were 11 hedge funds in our database with LILA positions at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a gander at the key hedge fund action encompassing Liberty Latin America Ltd. (NASDAQ:LILA).
How are hedge funds trading Liberty Latin America Ltd. (NASDAQ:LILA)?
Heading into the fourth quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LILA over the last 17 quarters. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Ashe Capital was the largest shareholder of Liberty Latin America Ltd. (NASDAQ:LILA), with a stake worth $71.5 million reported as of the end of September. Trailing Ashe Capital was Berkshire Hathaway, which amassed a stake valued at $46.3 million. Two Creeks Capital Management, Bill & Melinda Gates Foundation Trust, and Millennium 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 Ashe Capital allocated the biggest weight to Liberty Latin America Ltd. (NASDAQ:LILA), around 5.46% of its 13F portfolio. Two Creeks Capital Management is also relatively very bullish on the stock, designating 0.54 percent of its 13F equity portfolio to LILA.
With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in Liberty Latin America Ltd. (NASDAQ:LILA). Arrowstreet Capital had $1.7 million invested in the company at the end of the quarter. John Thiessen’s Vertex One Asset Management also initiated a $1.2 million position during the quarter. The only other fund with a new position in the stock is John Zaro’s Bourgeon Capital.
Let’s also examine hedge fund activity in other stocks similar to Liberty Latin America Ltd. (NASDAQ:LILA). We will take a look at Simpson Manufacturing Co, Inc. (NYSE:SSD), Liberty Latin America Ltd. (NASDAQ:LILAK), Eldorado Resorts Inc (NYSEArca:ERI), and Cronos Group Inc. (NASDAQ:CRON). This group of stocks’ market values match LILA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SSD | 13 | 215110 | -4 |
| LILAK | 20 | 375106 | -2 |
| ERI | 44 | 1020275 | 7 |
| CRON | 11 | 93920 | 3 |
| Average | 22 | 426103 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $426 million. That figure was $154 million in LILA’s case. Eldorado Resorts Inc (NYSEArca:ERI) is the most popular stock in this table. On the other hand Cronos Group Inc. (NASDAQ:CRON) is the least popular one with only 11 bullish hedge fund positions. Liberty Latin America Ltd. (NASDAQ:LILA) 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 LILA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LILA investors were disappointed as the stock returned 4.3% 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.
