Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Elastic N.V. (NYSE:ESTC).
Is Elastic N.V. (NYSE:ESTC) a buy right now? The best stock pickers are becoming hopeful. The number of bullish hedge fund positions improved by 3 in recent months. Our calculations also showed that ESTC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ESTC was in 30 hedge funds’ portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with ESTC holdings 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 today’s marketplace there are a multitude of gauges stock traders employ to evaluate stocks. A couple of the most underrated gauges are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the best picks of the elite fund managers can trounce the S&P 500 by a superb margin (see the details here).
Dmitry Balyasny of Balyasny Asset Managemnet
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. Let’s take a look at the latest hedge fund action encompassing Elastic N.V. (NYSE:ESTC).
How have hedgies been trading Elastic N.V. (NYSE:ESTC)?
At Q3’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ESTC over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Sylebra Capital Management was the largest shareholder of Elastic N.V. (NYSE:ESTC), with a stake worth $248.3 million reported as of the end of September. Trailing Sylebra Capital Management was Holocene Advisors, which amassed a stake valued at $96.4 million. Whale Rock Capital Management, Alkeon Capital Management, and Tairen Capital 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 Sylebra Capital Management allocated the biggest weight to Elastic N.V. (NYSE:ESTC), around 10.85% of its portfolio. Tairen Capital is also relatively very bullish on the stock, dishing out 10.4 percent of its 13F equity portfolio to ESTC.
As industrywide interest jumped, key money managers were breaking ground themselves. Whale Rock Capital Management, managed by Alex Sacerdote, initiated the biggest position in Elastic N.V. (NYSE:ESTC). Whale Rock Capital Management had $87.6 million invested in the company at the end of the quarter. Larry Chen and Terry Zhang’s Tairen Capital also made a $70.7 million investment in the stock during the quarter. The other funds with brand new ESTC positions are Josh Resnick’s Jericho Capital Asset Management, Dmitry Balyasny’s Balyasny Asset Management, and John Overdeck and David Siegel’s Two Sigma Advisors.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Elastic N.V. (NYSE:ESTC) but similarly valued. These stocks are Genesee & Wyoming Inc (NYSE:GWR), Dr. Reddy’s Laboratories Limited (NYSE:RDY), The Madison Square Garden Company (NYSE:MSG), and Morningstar, Inc. (NASDAQ:MORN). This group of stocks’ market valuations resemble ESTC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GWR | 31 | 783531 | 5 |
| RDY | 13 | 95340 | 2 |
| MSG | 45 | 1729215 | -5 |
| MORN | 24 | 258250 | 4 |
| Average | 28.25 | 716584 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $717 million. That figure was $867 million in ESTC’s case. The Madison Square Garden Company (NYSE:MSG) is the most popular stock in this table. On the other hand Dr. Reddy’s Laboratories Limited (NYSE:RDY) is the least popular one with only 13 bullish hedge fund positions. Elastic N.V. (NYSE:ESTC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 ESTC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ESTC were disappointed as the stock returned -3.6% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
