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 Total Return Index ETFs returned 27.5% through the end of November. 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 Apellis Pharmaceuticals, Inc. (NASDAQ:APLS).
Is Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) a healthy stock for your portfolio? Hedge funds are taking an optimistic view. The number of long hedge fund positions moved up by 7 lately. Our calculations also showed that APLS 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.
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.
Nathan Fischel of DAFNA Capital 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. We’re going to analyze the fresh hedge fund action surrounding Apellis Pharmaceuticals, Inc. (NASDAQ:APLS).
How have hedgies been trading Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)?
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 41% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in APLS a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
More specifically, Hillhouse Capital Management was the largest shareholder of Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), with a stake worth $112.7 million reported as of the end of September. Trailing Hillhouse Capital Management was Cormorant Asset Management, which amassed a stake valued at $71.7 million. Millennium Management, Sectoral Asset Management, and OrbiMed Advisors 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 Cormorant Asset Management allocated the biggest weight to Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), around 4.36% of its portfolio. Sectoral Asset Management is also relatively very bullish on the stock, dishing out 4.14 percent of its 13F equity portfolio to APLS.
As industrywide interest jumped, key hedge funds have jumped into Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) headfirst. Millennium Management, managed by Israel Englander, established the biggest call position in Apellis Pharmaceuticals, Inc. (NASDAQ:APLS). Millennium Management had $7.2 million invested in the company at the end of the quarter. Nathan Fischel’s DAFNA Capital Management also initiated a $4.1 million position during the quarter. The other funds with new positions in the stock are Richard Driehaus’s Driehaus Capital, John Overdeck and David Siegel’s Two Sigma Advisors, and Highbridge Capital Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) but similarly valued. These stocks are Easterly Government Properties Inc (NYSE:DEA), Archrock, Inc. (NYSE:AROC), USANA Health Sciences, Inc. (NYSE:USNA), and HNI Corp (NYSE:HNI). This group of stocks’ market valuations resemble APLS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DEA | 9 | 82346 | 3 |
| AROC | 11 | 20540 | 3 |
| USNA | 12 | 169990 | -1 |
| HNI | 16 | 79013 | 2 |
| Average | 12 | 87972 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $88 million. That figure was $350 million in APLS’s case. HNI Corp (NYSE:HNI) is the most popular stock in this table. On the other hand Easterly Government Properties Inc (NYSE:DEA) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) is more popular among hedge funds. 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. Hedge funds were also right about betting on APLS as the stock returned 11.6% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
