It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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 Redwood Trust, Inc. (NYSE:RWT).
Redwood Trust, Inc. (NYSE:RWT) investors should pay attention to an increase in support from the world’s most elite money managers in recent months. RWT was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. There were 13 hedge funds in our database with RWT holdings at the end of the previous quarter. Our calculations also showed that RWT 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.
Today there are dozens of tools stock traders have at their disposal to assess stocks. Two of the most underrated tools are hedge fund and insider trading activity. Our experts have shown that, historically, those who follow the best picks of the elite money managers can beat the S&P 500 by a healthy margin (see the details here).
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the fresh hedge fund action surrounding Redwood Trust, Inc. (NYSE:RWT).
How are hedge funds trading Redwood Trust, Inc. (NYSE:RWT)?
Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in RWT a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
The largest stake in Redwood Trust, Inc. (NYSE:RWT) was held by Wallace R. Weitz & Co., which reported holding $55.8 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $14 million position. Other investors bullish on the company included Millennium Management, Balyasny Asset Management, and Winton Capital Management. In terms of the portfolio weights assigned to each position Wallace R. Weitz & Co. allocated the biggest weight to Redwood Trust, Inc. (NYSE:RWT), around 2.27% of its 13F portfolio. Ellington is also relatively very bullish on the stock, dishing out 0.41 percent of its 13F equity portfolio to RWT.
As industrywide interest jumped, key hedge funds have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, assembled the most outsized position in Redwood Trust, Inc. (NYSE:RWT). Point72 Asset Management had $6.5 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also made a $1.6 million investment in the stock during the quarter. The other funds with brand new RWT positions are Benjamin A. Smith’s Laurion Capital Management, Michael Gelband’s ExodusPoint Capital, and Paul Tudor Jones’s Tudor Investment Corp.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Redwood Trust, Inc. (NYSE:RWT) but similarly valued. These stocks are Owens-Illinois Inc (NYSE:OI), Brinker International, Inc. (NYSE:EAT), ICF International Inc (NASDAQ:ICFI), and MaxLinear, Inc. (NYSE:MXL). This group of stocks’ market valuations resemble RWT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OI | 22 | 355523 | 1 |
| EAT | 26 | 231758 | -2 |
| ICFI | 10 | 31687 | -5 |
| MXL | 12 | 23578 | 5 |
| Average | 17.5 | 160637 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $119 million in RWT’s case. Brinker International, Inc. (NYSE:EAT) is the most popular stock in this table. On the other hand ICF International Inc (NASDAQ:ICFI) is the least popular one with only 10 bullish hedge fund positions. Redwood Trust, Inc. (NYSE:RWT) 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 RWT wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RWT investors were disappointed as the stock returned -1.4% 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.
