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 Guardant Health, Inc. (NASDAQ:GH).
Is Guardant Health, Inc. (NASDAQ:GH) a healthy stock for your portfolio? Investors who are in the know are in an optimistic mood. The number of bullish hedge fund bets advanced by 5 in recent months. Our calculations also showed that GH 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.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Andreas Halvorsen of Viking Global
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 fresh hedge fund action surrounding Guardant Health, Inc. (NASDAQ:GH).
What have hedge funds been doing with Guardant Health, Inc. (NASDAQ:GH)?
At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 26% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GH over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, Viking Global held the most valuable stake in Guardant Health, Inc. (NASDAQ:GH), which was worth $183.5 million at the end of the third quarter. On the second spot was Coatue Management which amassed $50.6 million worth of shares. Point72 Asset Management, Hitchwood Capital Management, and Renaissance Technologies 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 Prosight Capital allocated the biggest weight to Guardant Health, Inc. (NASDAQ:GH), around 1.48% of its portfolio. Element Capital Management is also relatively very bullish on the stock, dishing out 1.39 percent of its 13F equity portfolio to GH.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Viking Global, managed by Andreas Halvorsen, initiated the biggest position in Guardant Health, Inc. (NASDAQ:GH). Viking Global had $183.5 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $20.5 million position during the quarter. The following funds were also among the new GH investors: Jeffrey Talpins’s Element Capital Management, James E. Flynn’s Deerfield Management, and Philip Hempleman’s Ardsley Partners.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Guardant Health, Inc. (NASDAQ:GH) but similarly valued. These stocks are AECOM (NYSE:ACM), Cemex SAB de CV (NYSE:CX), New York Community Bancorp, Inc. (NYSE:NYCB), and Skechers USA Inc (NYSE:SKX). This group of stocks’ market valuations are closest to GH’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ACM | 26 | 956455 | 4 |
| CX | 9 | 59628 | -2 |
| NYCB | 23 | 297857 | 4 |
| SKX | 26 | 520591 | 3 |
| Average | 21 | 458633 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $459 million. That figure was $410 million in GH’s case. AECOM (NYSE:ACM) is the most popular stock in this table. On the other hand Cemex SAB de CV (NYSE:CX) is the least popular one with only 9 bullish hedge fund positions. Guardant Health, Inc. (NASDAQ:GH) is not the most popular stock in this group but hedge fund interest is still above average. 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 GH as the stock returned 21.7% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
