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 returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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’ 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 Medley Capital Corp (NYSE:MCC).
Medley Capital Corp (NYSE:MCC) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds’ portfolios at the end of March. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Mackinac Financial Corporation (NASDAQ:MFNC), Energous Corporation (NASDAQ:WATT), and Marrone Bio Innovations Inc (NASDAQ:MBII) to gather more data points.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
James Dondero of Highland Capital Management
Let’s take a gander at the latest hedge fund action encompassing Medley Capital Corp (NYSE:MCC).
What does smart money think about Medley Capital Corp (NYSE:MCC)?
At Q1’s end, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards MCC over the last 15 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
The largest stake in Medley Capital Corp (NYSE:MCC) was held by FrontFour Capital Group, which reported holding $5.1 million worth of stock at the end of March. It was followed by Moab Capital Partners with a $4.9 million position. Other investors bullish on the company included Fondren Management, Roumell Asset Management, and Highland Capital Management.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: BlueCrest Capital Mgmt.. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Highland Capital Management).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Medley Capital Corp (NYSE:MCC) but similarly valued. We will take a look at Mackinac Financial Corporation (NASDAQ:MFNC), Energous Corporation (NASDAQ:WATT), Marrone Bio Innovations Inc (NASDAQ:MBII), and Saratoga Investment Corp (NYSE:SAR). This group of stocks’ market caps are similar to MCC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MFNC | 7 | 14523 | 2 |
| WATT | 4 | 3055 | 0 |
| MBII | 3 | 13836 | 1 |
| SAR | 2 | 953 | 1 |
| Average | 4 | 8092 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $19 million in MCC’s case. Mackinac Financial Corporation (NASDAQ:MFNC) is the most popular stock in this table. On the other hand Saratoga Investment Corp (NYSE:SAR) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Medley Capital Corp (NYSE:MCC) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately MCC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MCC were disappointed as the stock returned -21.9% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
